- CFA Exams
- CFA Exam: Level I 2021
- Study Session 3. Quantitative Methods (2)
- Reading 9. Common Probability Distributions
- Subject 12. Monte Carlo Simulation

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**CFA Practice Question**

Consider the following statements:

II. Monte Carlo simulation requires the specification of a probability distribution.

III. Monte Carlo simulation is very useful, but it is not adequate for the development of estimates of Value at Risk.

I. Monte Carlo analysis is helpful in the development of sensitivity analysis regarding the assumptions of a model.

II. Monte Carlo simulation requires the specification of a probability distribution.

III. Monte Carlo simulation is very useful, but it is not adequate for the development of estimates of Value at Risk.

Which of the above statements is correct?

Correct Answer: I and II

Statements I and II are true, statement III is false.

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**User Contributed Comments**
4

User |
Comment |
---|---|

danlan |
II is required so we can use the proba to generate samples. |

surob |
how about I? Why is it correct answer? |

bdaguy |
This isn't addressed in the notes but is true as it relates to measuring the change in a specified output when altering given inputs. By observing the amount of change in the output, it helps determine the most critical (ie. most important) inputs. |

Matt26 |
Thanks bdaguy! |