Monte Carlo - Example

You've probably seen portfolio projections that use a constant percentage of growth each year. That's clearly a major simplification.

What if you got two bad years in a row right at the start of your projection period?

In the Monte Carlo simulation, one of the five ranges of actual S&P 500 yearly change is randomly selected for each year. Five parallel simulations are run for 10 and 20 years so that you can see cumulative effects.

After 20 years, your portfolio can vary by a factor of four..

Monte Carlo Simulation

Thanks for the example. I created a forum for probability and statistics and moved this post there. I can't believe I forgot to add this forum in the beginning.

I have been studying random walks and brownian motion for my Financial Economics actuarial exam (MFE). It is amazing how you can predict the value of a risky asset in a risk free setting. The stock market is itself a random walk.

Can you explain the calculations for each year? Do I understand right that you are using a random walk based on a certain variance?

Chris,
Let me know your email - I'll send you the spreadsheet, so you can see exactly what's going on.
Robert