Page 69 - FINAL CFA I SLIDES JUNE 2019 DAY 3
P. 69
LOS 10.q: Compare Monte Carlo simulation and
historical simulation. Session Unit 3:
10. Common Probability Distributions
Historical simulation is based on actual changes in value or risk factors over prior period, rather than the probability
distribution (likelihood), as in Monte Carlo simulation.
Advantage? Actuals remove need for subjective estimates!
Disadvantage? Past changes in risk factors may not be a good indication of future changes e.g. events that occur
infrequently may not be reflected in historical simulation results unless the events occurred during the period from which
the values for risk factors are drawn.
It cannot address the sort of “what if” questions that Monte Carlo simulation can e.g. what if we increase the
variance of one of the risk factors by 20%? Historical simulation cannot do this!
