Question

Describe the steps needed to perform the Monte Carlo Simulation.

Answer 1

Monte Carlo simulation is a computerized mathematical technique that allows people to account for risk in quantitative analysis and decision making. The technique is used by professionals in such widely disparate fields as finance, project management, energy, manufacturing, engineering, research and development, insurance, oil & gas, transportation, and the environment. It furnishes the decision maker with a range of possible outcomes and the probabilities they will occur for any choice of action.

During a Monte Carlo simulation, values are sampled at random from the input probability distributions. Each set of samples is called an iteration, and the resulting outcome from that sample is recorded. Monte Carlo simulation does this hundreds or thousands of times, and the result is a probability distribution of possible outcomes.

Steps needed for simulation of Monte Carlo:

Step 1: Sampling of random variables

Generating samples of random variables

Step 2: Numerical Experimentation

Evaluation performance function

Step 3: Statistic Analysis on model output

Extracting probabilistic information

Generalistic example for any expression:

Step 1: Create a parametric model.

Step 2: Generate a set of random inputs.

Step 3: Evaluate the model and store the results .

Step 4: Repeat steps 2 and 3.

Step 5: Analyze the results using histograms, summary statistics, confidence intervals etc