Financial Risk Manager Part 1
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Which of the following variance reduction techniques is (are) required to reduce the standard error estimate which ultimately is important for the correctness of the simulation?
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NNikitesh
A
Antithetic variate technique
B
Control variate technique
C
Both options A and B
D
Neither options A nor B
Explanation:
The standard deviation cannot be controlled and increasing the number of generated scenarios is too costly. The alternative is to use variance reduction techniques for reducing the standard error estimate. The two most commonly used techniques are antithetic variates and control variates.
Explanation:
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Antithetic variate technique: This method involves generating pairs of negatively correlated random variables to reduce variance. For each random draw, its antithetic counterpart is also used, which helps cancel out some of the variability.
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Control variate technique: This method uses a variable with known expected value that is correlated with the variable of interest. By adjusting the simulation results using this control variable, variance can be reduced.
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Both techniques are important for reducing standard error estimates in Monte Carlo simulations, which is crucial for the correctness and efficiency of simulation results. Using variance reduction techniques allows for more accurate estimates with fewer simulation runs, making the simulation process more efficient and reliable.
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