6 Simulation Methods

Question 1

Continuous compound returns

Answer 1

P_t = P_0*exp(r)

Question 2

Compounded returns for T_0 = 100 and T_1 = 120

Answer 2

HPR = 120/100 - 1 =20%
R_cc = log(120/100) = 18.23%
R_simple = exp(.1823) -1 = 20%

Question 3

Monte Carlo simulation

Answer 3

Technique based on the repeated generation of one or more risk factors to generate a distribution of security values

Question 4

Uses of Monte Carlo Simulation

Answer 4

1) Value complex securities
2) Simulate the profits/losses from a trading strategy
3) Calculate estimates of value at risk (VaR)
4) Simulate pension fund assets and liabilities over time.
5) Value portfolios of assets that have non-normal return distributions.

Question 5

Advantages and disadvantages of Monte Carlo

Answer 5

Advantage: Inputs are not limited to historical data
Disadvantage: Complexity, data quality

Question 6

Resampling

Answer 6

Method for generating data inputs to use in a simulation.

Question 7

Bootstrap resampling

Answer 7

Using resampling to provide inputs into a bootstrap model.