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

Which statement about a guarantee-cost estimate from Monte Carlo simulation is correct?

Quadrupling the number of simulations roughly halves the standard error, since the error of a Monte Carlo mean falls in proportion to one over the square root of the number of paths. Doubling only reduces it by about 29%.

  1. ADoubling the number of simulations halves the standard error of the estimate
  2. BQuadrupling the number of simulations roughly halves the standard error of the estimateCorrect
  3. CThe standard error does not depend on the number of simulations
  4. DUsing antithetic variates always increases the standard error
  5. Simulation gives an exact value of the guarantee when at least 1,000 paths are used

Explanation

The standard error of a sample mean is sigma divided by the square root of n, so quadrupling n halves it. Doubling n reduces it only by a factor of root 2. Antithetic variates are a variance-reduction technique and normally reduce error.

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