Groundlearn / Glossary / Monte Carlo simulation
Monte Carlo simulation
A CFA and FRM term, defined in plain English with the distinction examiners test.
What it means
Estimating a distribution of outcomes by repeatedly drawing random inputs from assumed distributions and recomputing the result.
The exam angle
The output is only as good as the assumed input distributions and correlations. It generates precision, not accuracy.
Where it appears in the syllabus
- Quantitative MethodsCFA Level I · exam weight 11–14% · Returns and benchmarks, time value, distributions, portfolio maths, regression.
- Quantitative AnalysisFRM Part I · exam weight 20% · Probability, hypothesis testing, regression, time series, volatility, simulation.
- Market Risk Measurement & ManagementFRM Part II · exam weight 20% · VaR and ES estimation, backtesting, EVT, GARCH, copulas, FRTB.
Related terms
- CorrelationCovariance divided by the product of the two standard deviations, giving a unit-free number between −1 and +1.
- KurtosisThe weight of a distribution’s tails.
- Standard deviationThe square root of variance, in the same units as the data.
- Arithmetic meanThe sum of the observations divided by their number.
- BootstrapResampling the observed data with replacement to estimate the sampling distribution of a statistic, without assuming a…
- Central limit theoremFor a large enough sample, the distribution of the sample mean approaches normal regardless of the shape of the…
Educational content only. This is not financial, investment, legal or regulatory advice. Check the official curriculum for your own exam before relying on any definition here.
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