1. What is Monte Carlo Simulation?

The Monte Carlo simulation is a mathematical technique that allows you to account for risk in quantitative analysis and decision making. It provides a range of possible outcomes and the probabilities they will occur for any choice of action.

2. How Does the Calculator Work?

The calculator uses Monte Carlo simulation to estimate future investment value:

Where:

• Initial Investment — Starting amount in USD
• Investment Period — Number of years to simulate
• Expected Return Rate — Average annual return rate
• Volatility — Standard deviation of returns
• Number of Simulations — How many scenarios to run

Explanation: The simulation runs thousands of scenarios with random variations in returns to calculate a probability distribution of possible outcomes.

3. Importance of Investment Simulation

Details: Simulation helps investors understand potential risks and rewards, account for market volatility, and make more informed financial decisions.

4. Using the Calculator

Tips: Enter initial investment amount, investment period in years, expected return rate, volatility percentage, and number of simulations to run. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: How accurate is the simulation?
A: Accuracy improves with more simulations, but it's still a projection based on historical patterns and assumptions.

Q2: What's a good number of simulations?
A: 1,000-10,000 simulations typically provide stable results without excessive computation time.

Q3: How should I interpret volatility?
A: Higher volatility means greater potential swings in returns, representing higher risk investments.

Q4: Does this account for inflation?
A: No, the results are nominal values. For real returns, adjust your expected return rate downward by expected inflation.

Q5: Can I simulate monthly contributions?
A: This basic version simulates lump-sum investments only. More advanced versions can model regular contributions.