- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 4. Common Probability Distributions
- Subject 12. Monte Carlo Simulation

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**CFA Practice Question**

Consider the following statements and identify which one(s) is (are) not correct.

II. Monte Carlo simulation is adequate for the treatment of simple problems.

III. Monte Carlo simulation only finds approximate solutions to a problem.

IV. Monte Carlo simulation only works with a large number of random samples.

I. Monte Carlo simulation requires the use of a computer.

II. Monte Carlo simulation is adequate for the treatment of simple problems.

III. Monte Carlo simulation only finds approximate solutions to a problem.

IV. Monte Carlo simulation only works with a large number of random samples.

Correct Answer: II only

Monte Carlo simulation is a tool that is best used in the treatment of complex problems. It requires time and a powerful computer to generate large amounts of data. Simple problems can be better approached with other tools.

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**User Contributed Comments**
5

User |
Comment |
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pmandgi |
well according to theory, the larger the number of simulations the more accurate the result. unless you have a closed form solution, all results are approximates. |

magicchip |
Well, with simple problems you can arrive at a solution with a very high degree of probability. For all intents and purposes, such a highly probable solution is a "closed form" solution. |

SuperKnight |
If it is used to treat complex problems I figured that it is "adequate" to treat simple problems? The question never asked whether there are better methods of approaching the problem it simply asked whether the approach was "adequate" for simple problems. If it is not adequate to treat simple problems then how can it logically be adequate to treat complex problems? I figured that all of the statements were correct. |

johntan1979 |
Why is III correct? Under the notes under the "Limitations" section, it is stated that "It is a complement to analytical methods. It provides only statistical estimates, not exact results." How could it be approximate? |

cfastudypl |
Johntan1979, III is correct because the words 'approximate' and estimate are synonymous. Just replace approximate with estimate and you will be fine. |