Financial Risk Manager Part 1
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Tim Yang, FRM, is working on building a model using a Monte Carlo simulation. However, he is concerned about the accuracy of the simulation which is measured by its standard error. Tim initially runs a model with 81 simulations and the standard deviation was found to be 27%. He then runs the model with 144 simulations and the standard deviation is still 27%. What are the standard errors for the simulations?
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NNikitesh
A
Standard error for the first simulation: 0.33%; Standard error for the second simulation: 0.19%
B
Standard error for the first simulation: 27%; Standard error for the second simulation: 27.00%
C
Standard error for the first simulation: 2.25%; Standard error for the second simulation: 3%
D
Standard error for the first simulation: 3%; Standard error for the second simulation: 2.25%
Explanation:
The standard error is calculated using the formula: Standard error = Standard deviation / √n
For the first simulation with n = 81 and standard deviation = 27%: Standard error = 27% / √81 = 27% / 9 = 3%
For the second simulation with n = 144 and standard deviation = 27%: Standard error = 27% / √144 = 27% / 12 = 2.25%
Therefore, the correct answer is D: Standard error for the first simulation: 3%; Standard error for the second simulation: 2.25%.
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