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Answer: Increasing the numberof replications
One way to increase the accuracy of estimation from Monte Carlo simulation is to increase the number of replications. Increasing the expected value does not affect the accuracy of the simulation. Increasing the variance does not improve accuracy of the simulation; the opposite effect occurs. Increasing the confidence level only provides a wider range of values but does not improve accuracy.
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A financial analyst is conducting a Monte Carlo simulation to determine the expected value of a stochastic variable. The primary objective is to minimize the standard error in the estimated expectation generated by the simulation. Among the strategies listed below, which is the most appropriate for reducing the standard error?
A
Increasing the expected value of the simulation
B
Increasing the numberof replications
C
Increasing the variance of the distribution
D
Increasing the confidence level of the simulation
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