13.6 Simulation modelling

Question 1

The Monte Carlo simulation method is an investment modelling technique - how does it work?

Answer 1

Simulation models are programmed to deal with variable factors by use of random numbers within defined probabilities. The simulated decision making process is repeated to calculate different NPVs each time to determine possible outcomes.

Question 2

What are the key weakenesses of the Monte Carlo simulation method?

Answer 2

• it is not a technique for decision making, only providing information to inform decisions
• it is very complex
• the time and costs involved may outweigh any investment benefit