Monte Carlo Simulations can help investors project future values and the impact to portfolios from market movements and cash flows.
A Monte Carlo Simulation outlines the many possible outcomes of a situation with random variables, as well as the probability that any particular outcome will occur. It is used in a wide variety of professional fields from finance to engineering and even astrology.
The technique has many applications in finance and is commonly used to help predict the future value of an asset when there are multiple variables involved.
In financial planning, Monte Carlo Simulations are most often by investors trying to ascertain how a variety of future market conditions may affect a portfolio's growth and ability to produce cash flows.
The Monte Carlo Simulation will produce a “probability of success” that your portfolio survives.
How Do I Determine the Right Mix of Assets?
What is Backtesting?