Monte Carlo is widely-used approach for computing VaR. Relative to other methods which of the following is a benefit of using this approach?
A) It is fully flexible in parameterizing the forward-looking distribution.
B) It always requires very few parameters.
C) It always uses normality.
D) It is the fastest approach to computing VaR.

Question

Monte Carlo is widely-used approach for computing VaR. Relative to other methods which of the following is a benefit of using this approach? 
A) It is fully flexible in parameterizing the forward-looking distribution.
B) It always requires very few parameters.
C) It always uses normality.
D) It is the fastest approach to computing VaR.

Quizplus · Accepted Answer

Monte Carlo is flexible in parameterizing the distribution because it is simulation-based and can handle complex distributions, unlike other methods that may rely on simplifying assumptions and preset distributional assumptions. Option B is incorrect because Monte Carlo requires a higher number of parameters than other methods due to the simulation process. Option C is incorrect because Monte Carlo can use any distribution fit to the available data, not just normality. Option D is incorrect since Monte Carlo is among the slower approaches.

Monte Carlo Is Widely-Used Approach for Computing VaR