21. Which of the following statements most accurately describe an appropriate step in the Monte Carlo(MC) approach for measuring risk of portfolio value?(a) Simulate ten valuation outcomes for the portfolio and measure the value-at-risk (VaR) basedon the simulated values.(b) Simulate a single price path and compute the mean return of the process.(c) Simulate thousands of valuation outcomes for the portfolio and measure the value-at-risk(VaR) based on the simulated values.(d) Simulate a single price path and compute the Sharpe ratio of the process.

Answered: 21. Which of the following statements…

6th Edition

ISBN:9781119256830

Author:Amos Gilat

Publisher:Amos Gilat

Chapter1: Starting With Matlab

Section: Chapter Questions

Problem 1P

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Step 1

Monte Carlo method is an efficient method to estimate the loss probabilities (VaR). It involves the following steps:

Need to generate n scenarios using sampling changes in the factors of risk over the horizon
Re-evaluate the portfolio at the last of horizon
Determine the proportion in scenarios where the loss exceeded for the several values in the vicinity of quantile

Simulation with sufficiently large samples give the best result.