Answer the following questions as True or False regarding Monte Carlo simulation

Question

Answer the following questions as True or False regarding Monte Carlo simulations:

1.) A Monte Carlo simulation is about obtaining many outcome values by which the risk of a model can be assessed.

2.) Monte Carlo simulations generate many outcomes that are organized into a frequency distribution.   

3.) The repetition (replication) of outcomes in Monte Carlo simulations cannot be accomplished with the data table capability of Excel.

4.) If there were no random numbers, we could not perform Monte Carlo simulations.

Explanation / Answer

1.) True

2.) True

Reason the monte carlo combines random sampling of inputs and simulation to generate a frequency distribution (array) of outcomes for any statistical problem with numerous inputs sampled over and over again.

3.) False

. Reason in monte carlo simulation, we run scenarios against the model hundreds or thousands of time and changing the inputs each time and then measuring the effect at the end of the runs and this can be easily achieved by data tables of excel.

4.) True

   Reason Because the essential idea of monte carlo simulation is using randomness to solve problems that might be deterministic in principle.

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