Of the 3 risk analysis metrics (sensitivity, scenario, and monte carlo), which measures market risk? Which measures standalone risk? I believe that sensitity measures the movement if one input is changed, scenario measures the movement if lots of scenarios are changed (so sensitivity + probability), but am not sure how to interpret monte carlo.
These are three different methodologies: Sensitivities: change one variable holding everything else constant and examine the results. Scenario: Try an optimistic, average, pessimistic scenarios (changing all variables)… Monte Carlo: Pick a range of possible values make the computer randomly try different numbers between the possible range in a norm dist fashion and average the results. Monte carlo is good, but complicated and it’s dependant on the inputs otherwise is GIGO, Garbage in Garbage Out…
whhich one of the tthree measures market risk and standalone risk?
Remember that beta is a measure of systematic (market risk) you can estimate it using regression analysis. Which page of the notes are you referring to? presumably somewhere in the PM section Sensitivity, monte carlo and scenario are all over the place in the curriculum…
well im in reading 30. the schweser notes dont mention it but ive come across 2 qbank problems where thye ask about this.
can you post the question?
It wasnt an actual question. . The Q asked which of the following are true. Choice C was “Monte Carlo simulation is used to estiamte market risks; scenario analysis measures stand alone risk.” Choice C was NOT correct, so the above statement in quotes is false. So i wanted to know how to rearrange that sentence to make it true.
So what measures market risk and what measures standalone?Assuming that C is incorrect…
all the three methods - Sensitivity, Scenario and Simulation - measure Standalone risk of the project and are dependent upon the variability of project cash flows. Market risk - is CAPM method.
cpk is so smart
so if I am using CAPM to measure the market risk, and I am not sure about the beta of this project so I vary the beta according to some distribution, and run a Monte Carlo analysis by keeping the cash flows fixed and changing the beta to see how it affects the project NPV - would I be measuring market or stand-alone risk then? cpk is right in general but the question is retarded. i dont expect a question like this from CFAI, this is someone pullin stuff out of their a$$ trying to come up with questions
Cash flow stress under various iterations of scenarios for the project at hand. Yea it measures standalone risk and not the systematic risk.