Disadvantage Monte Carlo (asset classes not actual assets)

CFA Level III
#1

Why does MCS simulate the return of asset classes instead of actual assets held in the portfolio?

#2

Forgive me, but I believe that one is supposed to use the returns from the Actual asset and not the asset classes.

#3

Well, apparently is a disadvantage, MCS does not uses acutal return…

#4

In a Monte Carlo simulation, you can do anything you want. If you want to use asset classes, you can use asset classes. If you want to use individual securities, you can use individual securities.

#5

It might be a disadvantage if the specific assets in your portfolio (or sub-assets) do not have historical data, in which case you use asset class historicals, which might not be as accurate.

#6

I tried running MCS using Crystal Ball, my laptop crashed, bad call …

#7

MCS uses historical data to predict future return.

#8

Try using @Risk instead.

#9

MCS with actual assets is predicting the past. MCS is for path dependent problems.

#10

Let’s try this again: in a Monte Carlo simulation, _ you can do anything you want _.

If you have views on the performance of individual assets, you can incorporate that into a Monte Carlo simulation.

It isn’t just about the past.