Building Probability Models in Excel Part 5: Modeling an Investment Using Discrete Random Variables

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The viewer will learn how to use a discrete random variable to simulate the return on an investment over a period of years, create a Monte Carlo simulation using the discrete random variable, and create a graph to represent the possible returns over 500 iterations.

Video Steps

1. Modeling a Simple Investment: Type in the amount invested, the possible returns, and the corresponding probabilities

2. Label column A and B “Return” and “Wealth,” respectively in A11 and B10

3. Enter =DISCRINV(RAND(),$B$2:$B$7,$A$2:$A$7) into cell A12 and copy down to cell A21

4. Enter =D2 into cell B11

5. Enter =B11*A12 into cell B12 and copy down to cell B21

6. Create a Monte Carlo Simulation: Enter =B21 into cell B23

7. Enter =B21 into cell B23

8. Click Tools > SimTools > Simulation Table

Author:Toby Reaper
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