[ 2009 FRM Sample Exam ] Quantitative Analysis Q3

jimgreen

 

3. Which of the following statements about Monte Carlo simulation is false?

A. Monte Carlo simulation can be used with a lognormal distribution.

B. Monte Carlo simulation can generate distributions for portfolios that contain only linear positions.

C. One drawback of Monte Carlo simulation is that it is computationally very intensive.

D. Assuming the underlying process is normal, the standard error resulting from Monte Carlo simulation is inversely related to the square root of the number of trials.

jimgreen

 

Correct answer is B

A is incorrect.  Monte Carlo simulation can be used with a lognormal distribution.

B is correct. Monte Carlo simulation can generate distribution for portfolios that contain linear as well as non-linear positions.

C is incorrect. Monte Carlo simulation is computationally very intensive.

D is incorrect.  Assuming the underlying process is normal, the standard error is inversely related to the square root of the number of trials.

Reference: Jorion, Value-at-Risk, Chapter 12.

Type of Question: Quantitative Analysis

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