In my last posting, I discussed the importance of scalability. In keeping with this topic, this week I continued to refine the MS Excel risk tolerance project. Using Monte Carlo simulation on my 9 model portfolios I have simulated the range of returns for each portfolio using monthly, quarterly, and annual periods as well as a 5 year average. After running the simulation, I now have the probable range of returns on each portfolio for the periods mentioned. This information is contained both in numeric and graphical formats and can then be compared to outside portfolios. So when a prospective client provides me a copy of their statement from a competitive firm, I can compare the range of returns on their portfolio(s) with my models. This information is also placed on a scatter plot graph for easy comparison. So if one of my models provides a better risk/return profile than one or more of their portfolios, it will be readily apparent. The goal here is to develop an objective analysis.
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