The general equation assumes the underlying asset is normally distributed returns with a mean of
μ and a standard deviation of σ. The simulation equation is as follows:
An advantage of the SMC approach is that it is able to address multiple risk factors by generating correlated scenarios based on a statistical distribution. A disadvantage of the SMC approach is that in some cases it may not produce an accurate forecast of future volatility, and increasing the number of simulations will not improve the forecast.
