Tuesday, March 4, 2014

Monte Carlo Details

10:42 AM



Question:

How are the economic scenarios used in the Monte Carlo simulations generated? Are they generated within the software, or does the software contain a set of hundreds of scenarios that are used when necessary?

I am trying to understand the stochastic projection component of this software better.

Any more information on this aspect of the software would be appreciated. Thanks.

Answer:

The random scenarios are generated assuming rates of returns of each asset class follow a lognormal distribution. Expected returns and standard deviations are based on historical information adjusted for current trends.

Random numbers are generated using Microsoft's random number generator. Each time the program runs a set of simulations the returns are generated based on the random number generator.

There is a blog post about Monte Carlo simulation:

http://retireware.blogspot.ca/2012/05/monte-carlo-simulation-is-mathematical.html

You will also find some information in the RetireWare help files:

https://secure.retireware.com/web/mc_help.aspx?language=en-CA&node=108&id=res_MChelp2.htm

On a related matter, this is a blog post about risk analysis and our approach:

http://retireware.blogspot.ca/2013/12/quantifying-risk.html

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