Monte Carlo Simulation is a popular sampling technique used to approximate the probability of certain outcomes by running multiple trial runs, using random variables. It is just one of the many methods for analyzing uncertainty propagation, where the goal is to determine how random variation, lack of knowledge, or error affects the sensitivity, performance, or reliability of the system that is being modeled.
Monte Carlo simulation is a method for evaluating a deterministic model iteratively, using sets of random numbers as inputs. It is often used when the model is complex, nonlinear, or involves more than just a couple uncertain parameters.
This is a widely successful method in risk analysis when compared with alternative methods or human intuition. When Monte Carlo simulations have been applied in space exploration and oil exploration, actual observations of failures, cost overruns and schedule overruns are routinely better predicted by the simulations than by human intuition or alternative “soft” methods.
This technique finds usage in a wide variety of industries including Finance, Insurance, Telecommunications and more. For example, Monte Carlo methods in finance are often used to calculate the value of companies, to evaluate investments in projects at a business unit or corporate level, or to evaluate financial derivatives. Monte Carlo methods used in these cases allow the construction of stochastic or probabilistic financial models as opposed to the traditional static and deterministic models, thereby enhancing the treatment of uncertainty in the calculation.
MonteCarlito
MonteCarlito is a free Excel-add-in to do Monte-Carlo simulations. To use it, just open the MonteCarlito.xls file along with your other files.
The main features of MonteCarlito are the following.
- Support for the following Statistical analysis – Mean, Median, Standard Error, Variance, Skewness, Kurtosis
- support for Histograms
- The results are directly generated in Excel sheet
- Supports High-speed simulation mode with minimized windows
MonteCarlito is an open source code which can be easily edited to include many more formulas. It is available for both Windows and OS X.
How to run Monte Carlo Simulation using Montecarlito?
Free download MonteCarlito from here. Open the MonteCarlito.xls file along with your other files, if any. Then, do the following.
- 1. Put all N formulas you want to simulate next to each other, preceded by the number of trials you want to run.
- 2. Select the N+1 cells and the 7x(N+1) cells beneath (indicated by frame).
- 3. Run macro “simulate” or press Ctrl+W to run simulation.
- – If the number of trials is negative, simulation is run in high-speed mode with minimized windows.
- – If the cell with the number of trials has bold font type, histograms (probability distribution representations) are created at the end of the simulation run.
- – If you select less than 7 rows of cells beneath formulas, you get less output.
Download MonteCarlito for Monte Carlo Simulation.
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