| Approach 1 | Historical simulation |
| Approach 2 | Monte Carlo simulation |
Yuen and Ruckey discuss the differences between the two approaches and then design the simulations, making key decisions at various steps. During the process, Yuen expresses a number of concerns:
- Concern 1: Returns from six of the nine factors are correlated.
Q) To address Concern 1 when designing Approach 2, Yuen should:
- model each factor or asset on a standalone basis.
- calculate the 15 covariance matrix elements needed to calibrate the model.
- specify a multivariate distribution rather than modeling each factor or asset on a standalone basis.
Pls share the answer also .like from my point of view it would be option option A
C is correct. Approach 2 is a Monte Carlo simulation. The returns of Portfolios A and B are driven by the returns of the nine underlying factor portfolios (based on nine common growth factors). In the case of asset or factor allocation strategies, the returns from six of the nine factors are correlated, and therefore it is necessary to specify a multivariate distribution rather than modeling each factor or asset on a standalone basis.
C is correct. Approach 2 is a Monte Carlo simulation. The returns of Portfolios A and B are driven by the returns of the nine underlying factor portfolios (based on nine common growth factors). In the case of asset or factor allocation strategies, the returns from six of the nine factors are correlated, and therefore it is necessary to specify a multivariate distribution rather than modeling each factor or asset on a standalone basis.