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FRM Part I · FRM Exam Part I · Simulation and Bootstrapping

Which statement best describes a limitation shared by both Monte Carlo simulation and bootstrapping when used for risk estimation?

Both methods depend on input quality, whether assumed model parameters or the historical sample, and both give estimates that vary with the random draws. Neither needs closed-form pricing, they do not give identical results across seeds, and both can handle nonlinear portfolios.

  1. AResults depend on the quality of the inputs or historical data, and are subject to sampling variabilityCorrect
  2. BBoth require a closed-form solution for the price of the instrument
  3. CBoth always produce identical results regardless of random seed
  4. DBoth can be used only for linear portfolios

Explanation

Both methods rely on inputs: Monte Carlo on assumed models and parameters, bootstrap on the historical sample. Both have sampling variability, so results differ across random seeds. Neither needs closed-form prices and both can handle nonlinear portfolios.

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