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ntroduction to Monte Carlo simulation
This article was adapted from Microsoft Office Excel 2007 Data Analysis and Business Modeling by Wayne L. Winston. Visit Microsoft Learning to learn more about this book.
This classroom-style book was developed from a series of presentations by Wayne Winston, a well known statistician and business professor who specializes in creative, practical applications of Excel. So be prepared — you may need to put your thinking cap on.
In this article * Overview * Who uses Monte Carlo simulation? * What happens when I enter =RAND() in a cell? * How can I simulate values of a discrete random variable? * How can I simulate values of a normal random variable? * How can a greeting card company determine how many cards to produce? * Problems
Overview
* Who uses Monte Carlo simulation? * What happens when I type =RAND() in a cell? * How can I simulate values of a discrete random variable? * How can I simulate values of a normal random variable? * How can a greeting card company determine how many cards to produce?
We would like to accurately estimate the probabilities of uncertain events. For example, what is the probability that a new product’s cash flows will have a positive net present value (NPV)? What is the risk factor of our investment portfolio? Monte Carlo simulation enables us to model situations that present uncertainty and then play them out on a computer thousands of times. NOTE The name Monte Carlo simulation comes from the computer simulations performed during the 1930s and 1940s to estimate the probability that the chain reaction needed for an atom bomb to detonate would work successfully. The physicists involved in this work were big fans of gambling, so they gave the simulations the code name Monte Carlo.
In the next five chapters, I’ll provide some examples of how you can use Microsoft Office Excel 2007 to perform Monte Carlo simulations. TOP OF PAGE
Who uses
This article was adapted from Microsoft Office Excel 2007 Data Analysis and Business Modeling by Wayne L. Winston. Visit Microsoft Learning to learn more about this book.
This classroom-style book was developed from a series of presentations by Wayne Winston, a well known statistician and business professor who specializes in creative, practical applications of Excel. So be prepared — you may need to put your thinking cap on.
In this article * Overview * Who uses Monte Carlo simulation? * What happens when I enter =RAND() in a cell? * How can I simulate values of a discrete random variable? * How can I simulate values of a normal random variable? * How can a greeting card company determine how many cards to produce? * Problems
Overview
* Who uses Monte Carlo simulation? * What happens when I type =RAND() in a cell? * How can I simulate values of a discrete random variable? * How can I simulate values of a normal random variable? * How can a greeting card company determine how many cards to produce?
We would like to accurately estimate the probabilities of uncertain events. For example, what is the probability that a new product’s cash flows will have a positive net present value (NPV)? What is the risk factor of our investment portfolio? Monte Carlo simulation enables us to model situations that present uncertainty and then play them out on a computer thousands of times. NOTE The name Monte Carlo simulation comes from the computer simulations performed during the 1930s and 1940s to estimate the probability that the chain reaction needed for an atom bomb to detonate would work successfully. The physicists involved in this work were big fans of gambling, so they gave the simulations the code name Monte Carlo.
In the next five chapters, I’ll provide some examples of how you can use Microsoft Office Excel 2007 to perform Monte Carlo simulations. TOP OF PAGE
Who uses