CFA Level I · CFA Level I Exam · Simulation of Financial Asset Prices and Returns
Compared with historical simulation, a parametric Monte Carlo simulation of asset returns is most likely to:
Parametric Monte Carlo simulation requires the analyst to assume a statistical distribution and its parameters for returns, then draws random values from it. Historical simulation instead resamples actual past returns and is therefore limited to outcomes that already occurred.
- Arely on the exact sequence of past returns
- Brequire an assumed statistical distribution for returnsCorrect
- Cbe limited to outcomes that occurred in the past
Explanation
Monte Carlo simulation draws random values from a specified distribution with chosen parameters. Historical simulation resamples actual past returns, so it is limited to observed outcomes and uses past data directly.
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