Book 1_Quan_Simulation method

Question 1

the relationship between normal and lognormal distributions

Answer 1

• If x is normally distributed, e^x follows a lognormal distribution

Question 2

• The lognormal distribution

Answer 2

is useful for modeling an asset’s future price as the result of a continuously compounded return on its current price.
+ If investment returns are independently distributed, past returns are not useful for predicting future returns.
+ If investment returns are identically distributed, their mean and variance do not change over time

Question 3

• Monte Carlo simulation:

Answer 3

+ uses randomly generated values for risk factors, based on their assumed distributions, to produce a distribution of possible security values.
+ Its limitations are that it is fairly complex and will provide answers that are no better than the assumptions used.

Question 4

• Bootstrap resampling

Answer 4

+ involves drawing repeated samples from a sample that represents the population, replacing the sampled observations each time so that they might be redrawn in another sample. T
+ The standard deviation of these sample means is an estimate of the standard error of the sample mean.
+ As with all simulation techniques, its answers are no better than the assumptions used