Author Topic: Monte Carlo Simulation  (Read 4707 times)


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Re: Monte Carlo Simulation
« Reply #20 on: December 03, 2018, 07:19:20 AM »
MC is most useful for convergence testing for derivative pricing models. Little to no use in 'value investing'
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Re: Monte Carlo Simulation
« Reply #21 on: December 03, 2018, 01:51:21 PM »
It sounds sort of reasonable, but I think there are plenty of cases were you aren't totally aware of the potential variance in outcomes before doing the simulation. You take some quick and easy mental short cuts and you decide it's a low risk thing that should work out in most cases. No Monte Carlo simulation needed. Right?

If you aren't totally aware of the potential variance in outcomes, how can you even reasonably make an assumption in how the outcomes are distributed?  If you are going to use Monte Carlo, you must normally make some assumption about the distribution from which you wish to make your random draws.  Some people automatically assume that a standard normal distribution should be used, but that's a bad assumption (could be log normal, could be poisson, could be some other non-symmetric distribution, could be anything, who knows).

Heavens, didn't LTCM go bust mostly because they failed to consider the possibility that their distribution of returns might be leptokurtic?  They went bust because of the fourth moment of the distribution, let alone the issue of appropriately characterizing the first two moments.

For investing, if I need to model something, I usually chuck it into the too hard pile.  For me, value should be obvious and I mostly I don't even bother with a DCF model.  The only purpose for which I've ever bothered to use Monte Carlo in my personal life is to help me thing about portfolio survival during the withdrawal phase in life.  For that purpose, it's quite an instructive tool because it shows clearly the nature of sequence of return risk, even if that risk is poorly parameterized.



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Re: Monte Carlo Simulation
« Reply #22 on: December 03, 2018, 02:08:05 PM »
Great continued input.  Just for the record, I had to google the definition and pronunciation of Leptokurtic.   ;) ;D  Learning something new every day.
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Re: Monte Carlo Simulation
« Reply #23 on: December 04, 2018, 11:40:52 AM »
Great discussion everyone.  You have exceeded my expectations.  Everyone gets 6 Golden Unicorns for participating and/or reading  [scratch that, make it 7, you all deserve 7 Golden Unicorns!  I am being generous.]

Seriously now, does anyone have a recommendation for a software or a website to run some Monte Carlo simulations?  Please tell me that I don't have to be a Computer Science major in order to make it work.  I would prefer it to be easy enough for a dumb American from Virginia to operate.

Thanks in advance!

I faintly remember Prof Damodaran mentioning a Crystal Ball add-in to Excel that has to be purchased separately.