CFA Level I · CFA Level I Exam · Simulation of Financial Asset Prices and Returns
Compared with historical simulation, Monte Carlo simulation for estimating portfolio risk is most likely to:
Monte Carlo simulation relies on a specified probability distribution and estimated parameters, such as means, volatilities and correlations, to generate scenarios. Historical simulation instead uses actual past returns, so the dependence on model assumptions is the main distinguishing feature of Monte Carlo.
- Arely on a specified distribution and parametersCorrect
- Buse only actual past returns as scenarios
- Cavoid any assumption about correlations
Explanation
Monte Carlo draws random outcomes from an assumed distribution with chosen parameters, so results depend on those assumptions. Historical simulation instead resamples actual past returns.
Did you get it right without looking?
One question tells you little. A timed set on Simulation of Financial Asset Prices and Returns shows your real accuracy, how long you take and where you lose marks.
More Simulation of Financial Asset Prices and Returns questions
- Compared with analytical valuation formulas, Monte Carlo simulation is most likely preferred for pricing an option whose payoff:
- Compared with Monte Carlo simulation based on a parametric distribution, bootstrap resampling is best described as:
- An analyst wants to estimate the value of a path-dependent option whose payoff depends on the average price of the underlying over its life.…
- A pension fund uses simulation to assess whether its assets will cover future liabilities under many interest rate and return scenarios. A k…
- An analyst simulates a stock price using a geometric Brownian motion model in which the continuously compounded return over each step is nor…
- In a Monte Carlo simulation, an analyst wants to cut the standard error of the estimated mean by half. Holding other inputs constant, the nu…