Lesson 15: Simulation of Continuous Variables

April 11, 2024

Review:

• Discrete Simulation
• Automation in Sheets

Presentation:

• Random Variables
  • Discrete Random Variables
    • Probability distribution table
    • Dice Simulation
    • =RANDBETWEEN()
  • Continuous Random Variables
    • Assume normal distribution
    • =norminv(rand(),$B$2,$B$3)
• Stock Market Simulation

Activity/Assignment:

• Stock Market Simulation in Sheets
  • Use Stock Market Simulation as a starting point
• Modifications Part 1
  • Generate a 40-year simulation (instead of 30)
  • Modify the simulation to add $1,000 to the balance each year
  • Make a histogram of your ending balances
• Modifications Part 2
  • Add a “fixed income” (bonds) component to your simulation
  • Assumptions
    • bond market returns are normally distributed
    • mean = 7.88%
    • standard deviation = 6.86%
  • Your “portfolio” should be 60% stocks and 40% bonds