Baran

 

The correct answer is D

 

Monte Carlo simulation is subject to model risk.

Baran

 

7、Which of the following statements about value at risk (VAR) is TRUE?

A) VAR decreases with lower confidence level.

B) VAR decreases with longer holding periods.

C) VAR is not dependent on the choice of holding period.

D) VAR is independent of probability level.

Baran

 

5、Which of the common methods of computing value at risk relies on the assumption of normality?

A) Variance/covariance.

B) Historical.

C) Monte Carlo simulation.

D) Rounding estimation.

Baran

 

4、The difference between a Monte Carlo simulation and a historical simulation is that a historical simulation uses randomly selected variables from past distributions, while a Monte Carlo simulation:

A) uses a computer to generate random variables. 

B) uses randomly selected variables from future distributions.

C) uses variables based on roulette odds. 

D) projects variables based on a priori principles.

Baran

 

The correct answer is A

 

A Monte Carlo simulation uses a computer to generate random variables from specified distributions.

Baran

 

3、Many analysts prefer to use Monte Carlo simulation rather than historical simulation because:

A) it is much easier to generate the required variables.

B) past data is often proprietary and difficult to obtain. 

C) computers can manipulate theoretical data much more quickly than historical data.

D) past distributions cannot address changes in correlations or events that have not happened before.

Baran

 

The correct answer is D

 

While the past is often a good predictor of the future, simulations based on past distributions are limited to reflecting changes and events that actually occurred. Monte Carlo simulation can be used to model based on parameters that are not limited to past experience.

Baran

 

The correct answer is B

 

Historical simulation is most applicable if there is a large sample of past returns to draw from. The computer capacity necessary for each is about the same, and certainly the occurrence of unfavorable results is no reason to reject historical simulation.

Baran

 

AIM 4: Compare the delta normal, historical simulation, and Monte Carlo simulation methods, and explain their appropriate uses.

 

1、One advantage of the Monte Carlo simulation approach over the historical method when calculating VAR is the simulation approach:

A) makes better use of computing power.

B) takes advantage of the normal distribution.

C) equates past performance to future results.

D) incorporates flexibility in modeling price paths.

Baran

 

The correct answer is A 

 

The Monte Carlo approach allows for whatever relationships the VAR modeler would like to take into account. It is the most flexible method for generating VAR.