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

 

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

 

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

 

The correct answer is A

 

The variance/covariance method relies on the assumption of normality.

Baran

 

6、Which value at risk methodology is most subject to model risk?

A) Parametric.

B) Variance/covariance.

C) Historical.

D) Monte Carlo simulation.

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

 

The correct answer is A

 

VAR measures the amount of loss in the left tail of the distribution and increases with lower probability levels. Conversely VAR decreases with lower confidence levels (which is 1 minus the probability level). VAR actually increases with increases in holding period.