CFA Level I · CFA Level I Exam · Simulation of Financial Asset Prices and Returns
Which statement about increasing the number of trials in a Monte Carlo simulation is most accurate?
Increasing the number of trials reduces the sampling error of simulated estimates, because the standard error shrinks roughly with the square root of the trial count. It cannot correct a wrongly specified input distribution or eliminate the need for distributional assumptions.
- AIt reduces the sampling error of the estimatesCorrect
- BIt removes the need to specify input distributions
- CIt corrects errors in the assumed return distribution
Explanation
More trials reduce sampling error, with the standard error falling roughly with the square root of the number of trials. They do not fix a misspecified distribution or remove the need for assumptions, since results depend on the inputs.
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