CFA Level I: Simulations Methods

Independently and identically distributed

With respect to random variables, the property of random variables that are independent of each other but follow the identical probability distribution.

Volatility

The standard deviation of the continuously compounded returns on the underlying asset

Monte Carlo simulation

A technique that uses the inverse transformation method for converting a randomly generated uniformly distributed number into a simulated value of a random variable of a desired distribution. Each key decision variable in a _____ requires an assumed statistical distribution; this assumption facilitates incorporating non-normality, fat tails, and tail dependence as well as solving high-dimensionality problems.

Contingent claim

A type of derivative in which one of the counterparties determines whether and when the trade will settle. An option is a common type.

Simulation trial

A complete pass through the steps of a simulation

Resampling

A statistical method that repeatedly draws samples from the original observed data sample for the statistical inference of population parameters.

Bootstrap

A resampling method that repeatedly draws samples with replacement of the selected elements from the original observed sample. It is usually conducted by using computer simulation and is often used to find standard error or construct confidence intervals of population parameters.