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Which of the following statements about approaches in retirement planning is least accurate?
A)
Monte Carlo techniques can be used by most individual investors.
B)
Monte Carlo techniques take into account probabilities for input variables.
C)
Deterministic planning techniques use multiple values for economic and financial variables.



Deterministic planning techniques use single values for economic and financial variables. Monte Carlo (MC) simulations generate a probabilistic forecast of retirement period values. Although MC analyses require computing powers, the advent of computers available at low cost provides the individual investor a means for incorporating probabilities into retirement planning process.

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Which of the following statements about Monte Carlo simulation is CORRECT? Monte Carlo simulation:
A)
typically produces approximately 100 trials.
B)
is best when it uses only historical data.
C)
forecasts a more accurate risk/return tradeoff than a deterministic approach.



History provides a view of only one possible path among the many that might occur in the future. It is difficult to estimate expected returns using historical figures because of the volatility factor. Monte Carlo analysis produces probability distribution by tabulating the outcomes of a large number (often 10,000) of simulated trials.

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When planning for retirement, an individual investor may wish to use a Monte Carlo approach over a deterministic approach because:
A)
Monte Carlo approaches are simpler and quicker to implement.
B)
deterministic approaches use inappropriate inputs.
C)
Monte Carlo approaches provide a better analysis of outcome ranges than the single wealth figure estimate generated by deterministic approaches.



Monte Carlo approaches generate ranges of outcomes that can be associated with probabilities of their occurrences. Although slightly more involved in implementation, and sometimes taking longer to generate, Monte Carlo generated ranges and or probabilities may better indicate to the client realistic retirement opportunities.

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Deterministic approaches differ from Monte Carlo approaches in that deterministic approaches:
A)
use probability forecasts whereas Monte Carlo approaches use best estimates.
B)
generate single numbers whereas Monte Carlo approaches generate a range of outcomes.
C)
generate ranges of outcomes whereas Monte Carlo approaches generate single numbers.



Monte Carlo approaches rely on probabilistic inputs to generate a range of outcomes that may provide better information than any method that generates a single number, like deterministic approaches.

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Probabilistic outcomes generated by a Monte Carlo approach to retirement planning do NOT generate which of the following?
A)
Potential risk/return tradeoffs.
B)
Higher probabilities of meeting high return expectations.
C)
Better incorporation of tax implications.



No forecasting method can affect probabilities of meeting high return expectations. Forecasting methods can only indicate future outcomes, and in the case of Monte Carlo approaches, potential risk/return tradeoffs can be generated, as well as better incorporating tax implications.

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