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Monte Carlo Simulation

A Monte Carlo method is a technique that can be used to solve a mathematical or statistical problem.  The method was invented in the late 1940s at Los Alamos National Laboratory.  Being secret, the work required a code name.  The name Monte Carlo was suggested which refers to the Monte Carlo Casino in Monaco.  Monte Carlo simulation is performed by computers using the Monte Carlo method.

Monte Carlo methods are used in finance to value and analyze complex portfolios and investments by simulating the various sources of uncertainty affecting their value, and then determining their average value over the range of resultant outcomes.  Monte Carlo Methods are also used for personal financial planning. For instance, by simulating the overall market, the chances of a portfolio allowing for retirement on a target income can be calculated. As appropriate, a client can then take greater risks with the retirement portfolio or start saving more money.  Or perhaps plan to spend a little less.

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