Financial Simulation and Investment Expectations
نویسنده
چکیده
Executive summary Future investment returns are uncertain; no reliable means to foresee them exists. However, institutions and individuals making financial decisions need an approach to model the range of possible future returns. Any approach requires two fundamental ingredients: • First, long-term historical returns must be examined to determine the attributes and interrelationships that characterize investment returns. • Second, a simulation method is required to translate the observed attributes and interrelationships among investment returns into the potential range of future returns. The variability or volatility around the average scenario in financial simulations often characterizes the risk of the investment decision under consideration. Financial planners employ one of two statistical procedures to generate estimates of future asset values: historical simulation and Monte Carlo simulation. This paper appraises the relative merits and limitations of these approaches.
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