cyber21

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) projects variables based on a priori principles.

B) uses randomly selected variables from future distributions.

C) uses a computer to generate random variables.

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

cyber21

A drawback of historical simulation is it:

A) depends on the accuracy of the random number generator.

B) may not accurately reflect possible outcomes.

C) may not account for very rare events.

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There are two major problems with historical simulation. The first is that it cannot account for events that do not occur in the sample. If a security began trading after 1987, for example, there would be no evidence of its behavior in a market crash. The other drawback is that the analyst cannot change the parameters of the distribution to examine how small changes might affect the asset’s behavior.

terpsichorefan

thanks for sharing