The Problems with Monte Carlo Simulation

Nawrocki, David
November 2001
Journal of Financial Planning;Nov2001, Vol. 14 Issue 11, p92
Academic Journal
Monte Carlo simulation has enjoyed a resurgence in financial literature in recent years.This paper explores the reasons why implementing Monte Carlo simulation is very difficult at best and can lead to incorrect decisions at worst.The problem is that the typical assumption set used in Monte Carlo simulation assumes normal distributions and correlation coefficients of zero, neither of which are typical in the world of financial markets. It is important for planners to realize that these assumptions can lead to problems with their analysis. Financial planners will find that exploratory simulation provides equivalent or better answers and is simpler to implement without assumptions. INSET: Monte Carlo Simulation: Challenging The Sacred Cow.


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