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The Monte Carlo Simulation: Understanding the Basics

What Is a Monte Carlo Simulation?

Analysts can assess possible portfolio returns in many ways. The historical approach, which is the most popular, considers all the possibilities that have already happened. However, investors shouldn’t stop at this. The Monte Carlo method is a stochastic (random sampling of inputs) method to solve a statistical problem, and a simulation is a virtual representation of a problem. The Monte Carlo simulation combines the two to give us a powerful tool that allows us to obtain a distribution (array) of results for any statistical problem with numerous inputs sampled over and over again.

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Keneilwe Tsotsotso
Keneilwe is DFI's Assistant COP Manager and helps manage our communities and their activities. As part of her role Keneilwe shares useful resources and insights from a wide variety of sources and authors with our community.