MC vs. MV

Quiz: see how close you can get to CFAI’s guidance answer: explain two ways that Monte Carlo simulation differs from mean-variance analysis in a multi-period setting.

Monte Carlo will help you assess dynamically the impact of rebalancing… And taxes… etc… Not available in one-period setting

pretty good. Here’s CFAI’s answer: The Monte Carlo simulation takes into account the cash flows into and out of the portfolio over time when stardard mean-variance analysis does not. Because investment returns can vary significantly from year to year, the timing of these cash inflows and outflows can create major differences in the final result. in a situation where there will be varying cash flows over the invetment period, the ending value of the portfolio is path dependent.

Monte Carlo can better handle the effects of path dependent assets (anything with optionality) Monte Carlo can be used to asses the after-tax optimal asset allocation