Future Investment Monte Carlo

• Monte Carlo Methods are used in a wide variety of simulations including financial

  • Rick creates an investment with a for loop (Code demo)

  • This is so deterministic, we can use a formal for future value of an investment (Code demo)

  • Is this realistic?

    • Someone tells you the average depth of the water in a stream is 6 inches deep

      • Is it possible to fall in an 8 foot hole while crossing this stream?

_______________________ ______________________________5 inches

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| |8ft hole

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|__________|

• Collaborative exercise

  • Approximate an investment fund 40 years ahead

    • 50% chance one year will see 6% growth

    • 15% chance one year will see 3% growth

    • 15% chance one year will see 9% growth

    • 10% chance one year will see -25% growth (a loss of 25% of all money in one year)

    • 10% chance one year will see +25% growth (same chance for a 25% gain in money)