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CFA Level I · CFA Level I Exam · Statistical Distributions for Financial Asset Prices and Returns

Compared with historical simulation, Monte Carlo simulation is most likely to:

Monte Carlo simulation lets the analyst change the assumed probability distributions and parameters, for example to test different volatilities or correlations. Historical simulation relies on observed past returns instead. Monte Carlo results are only as good as the model assumptions, so accuracy is never guaranteed.

  1. Arely on observed past returns
  2. Ballow assumed distributions to be changedCorrect
  3. Cguarantee accurate results

Explanation

Monte Carlo draws from distributions chosen by the analyst, so assumptions such as volatility or correlation can be altered to explore scenarios. Historical simulation uses actual past returns. Neither method guarantees accuracy, because Monte Carlo results depend on the assumptions and the model.

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