Financial Risk Manager Part 1

Explanation

Simulation has several advantages, but being computationally inexpensive is NOT one of them. Let's analyze each option:

A. It allows for the study of “what if” questions - This is TRUE. Simulation enables analysts to test different scenarios and assumptions by changing input parameters.

B. It saves a considerable amount of time for analysts - This is TRUE. While the computational time may be significant, simulation saves analysts' time compared to manual calculations or analytical solutions for complex problems.

C. It incorporates multiple relationships and serial correlations between random variables - This is TRUE. Simulation can model complex dependencies and correlations that are difficult to handle with analytical methods.

D. It’s a computationally inexpensive method of analyzing future scenarios - This is FALSE. Simulation is often computationally intensive, especially when:

• A large number of replications are needed for statistical precision
• Complex models with many variables are used
• High-dimensional problems require significant computational resources

The explanation provided in the text confirms this: "Sometimes the number of replications required to generate precise solutions may be very large and unachievable unless the analyst invests in the latest and most developed computer systems which obviously come with extra costs." This highlights that simulation can be computationally expensive, not inexpensive.