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

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**CFA Practice Question**

Which of the following statements is (are) not correct?

II. Monte Carlo simulation should include a time grid specification.

III. Monte Carlo simulation only works if one specifies risk factors.

IV. Monte Carlo simulation is an iterative method.

I. Monte Carlo simulation stands on its own and does not require any other analytical methods.

II. Monte Carlo simulation should include a time grid specification.

III. Monte Carlo simulation only works if one specifies risk factors.

IV. Monte Carlo simulation is an iterative method.

Correct Answer: I only

The statement that "Monte Carlo simulation stands on its own and does not require any other analytical methods" is incorrect. Monte Carlo Simulation should be used in conjunction with other analytical tools. It is a complementary method. All other statements are correct.

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**User Contributed Comments**
3

User |
Comment |
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bkballa |
what is an iterative method? |

cleopatraliao |
@bkballa an iterative method is a way of finding a solution by using successive approximation starting from an initial guess.It's typically used when the problem is too complicated and cannot find a analytical solution...e.g. if a formula is extremely difficult to solve then it is best to use an iterative process and starting from an initial guess then try different numbers until it is solved. The iterative process is normally done by using a computer. |

Kaloyan |
I am not sure I understand the meaning of "time grid specification", which is part of II. Is this the time step specified in the model to run with/at? |