Question

Identify the advantages of Monte Carlo simulation. Also, describe total portfolio management. Any similarities or differences?

Answer 1

Below are the advantages of Monte Carlo Simulation:

1. Analysis done through graphical results which can be easy to grasp at ease.
2. Outcome generated reflects the next best estimates of further outcomes prospected.
3. Sensitivity Analysis to figure out the bigger impacting variables
4. Scenario Analysis to figure out the effects of variables in different scenarios.
5. Knowledge of each outcome with the distinct variables

Total Portfolio Management focuses on maximizing the return by lowering the risk through via long term horizon. Pension plans adopt this type of investment. This is mainly to eradicate the short term collapses of the stock growth and achieve maximum out of the investment by going for longer duration. Also focused more on to risk it get's to exposed and all efforts made for risk reduction.

Similarities in between Monte Carlo simulation and Total Portfolio Management are , we'd see how much can an investment generate a return considering the risk on the parameters of probability. Differences in between these two could be, we'll be able to see outcomes and predictions up front before it becomes a history, rather investing it into the Total Portfolio Management and then evidence the profit booking.