What is Monte Carlo simulation?

What is Monte Carlo simulation?

Approach: Explain use of random sampling for estimation.

Numerical method using random sampling to estimate quantities. For estimating expectation E[f(X)], generate samples X_i and compute (1/N)∑f(X_i). By law of large numbers, converges to true value.

Follow-up: How do you reduce variance?

Key concepts: random sampling, law of large numbers, numerical integration.