Trident capital case

Sample exam 2 (paid 1) Management assumes portfolios returns are normally distributed. But then near the end it says a lot of things about engaging in options. Just confused. Why can’t I say Monte Carlo simulation as VAR method? - sticky

cause it says “given management assumption” :slight_smile:

why can’t i say monte carlo? - sticky

^haha I said Monte too b/c I figured it was teh best of the 3…the back of my head was saying since its Normal you can use Variance-Covariance method, but of course I thougth it was a trap, went with Monte and it was Variance-Covariance.

then why is monte carlo wrong?

Sticky, I’m with you b/c with Monte you can assume any distribution and run multiple VARs for a better estimte so I would chose Monte over Variance-Covariance. BUT I guess CFAI sees it that since Mgmt is assuming the returns are Normal you can just use the Variance-Covarince method which assumes normal returns and is easy to calculate…

Point is to answer the question and not the best possible solution. I remember similar questions on Level 2, they would say “assume bla bla bla”

it’s very strange because later in this case CFA prefer Sortino over Sharpe ratio because of options in portfolio…but at the same time we should use analitical method for VAR ???

the only excuse is that for the Monte Carlo question, you should only focus on the initial portion of the whole question … options are not in the picture (for following questions) yet.