CFA Level I · CFA Level I Exam · Simulation of Financial Asset Prices and Returns
A simulation of a stock price uses 10,000 trials, and the standard error of the estimated mean terminal price is 0.80. The analyst wants to cut the standard error to 0.20 with all else equal. The number of trials required is closest to:
Standard error falls with the square root of the number of trials, so reducing it from 0.80 to 0.20, a factor of four, requires sixteen times as many trials. That is 160,000 trials. Quadrupling to 40,000 would only halve the error.
- A40,000
- B100,000
- C160,000Correct
Explanation
Standard error is proportional to 1/√n. Cutting it by a factor of 4 requires n to rise by a factor of 16: 10,000 × 16 = 160,000. Choosing 40,000 mistakenly scales trials linearly with the factor of 4.
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