Answer: involves assigning each key variable a statistical distribution.

## Explanation **Correct Answer: B** Monte Carlo simulation involves assigning each key variable a statistical distribution. This is a fundamental characteristic of the method, where variables are modeled with specific probability distributions. **Analysis of Other Options:** - **A**: Incorrect - Randomly selecting returns from historical periods describes **historical simulation** or bootstrapping, not Monte Carlo simulation. - **C**: Incorrect - While historical data may be used to calibrate distributions, Monte Carlo simulation does not inherently assume that past returns guide future returns. It generates scenarios based on statistical distributions. **Key Points:** - Monte Carlo simulation models variables with probability distributions - It generates random scenarios rather than resampling historical data - The method can incorporate various distributional assumptions

Author: LeetQuiz Editorial Team