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IAI Actuarial Core Principles · Economic Modelling · Valuing benefit guarantees using simulation

In a simulation to value a guarantee, the standard error of the estimated cost is currently Rs 2. What number of simulations is needed, approximately, to reduce the standard error to Rs 1, other things equal?

The number of simulations must be quadrupled. Standard error falls in proportion to one over the square root of the number of simulations, so halving the error requires four times as many runs.

  1. ADouble the number
  2. BQuadruple the numberCorrect
  3. CIncrease it eightfold
  4. DHalve the number
  5. Increase it by Rs 1 per simulation

Explanation

Standard error is proportional to 1/sqrt(N). Halving it needs N to be multiplied by 4. Doubling N reduces the error only by a factor of about 1.41.

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