Key Takeaways
- Three distributions cover most variables: Normal (symmetric, like rent growth), Triangular (bounded, like cap rates), Uniform (equal likelihood).
- Excel Monte Carlo uses RAND(), NORM.INV(), and Data Tables; Python uses NumPy for faster, more robust simulations.
- Key outputs: mean, median, percentile bounds, and probability of exceeding target thresholds.
- Monte Carlo provides probability-of-achievement metrics that scenario analysis cannot—e.g., 68% probability of 15%+ IRR.
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Test Your Knowledge
1.What is the minimum recommended number of iterations for a Monte Carlo simulation?
2.How should correlation between input variables be handled in Monte Carlo simulations?
3.What key output from Monte Carlo simulation helps set investment committee hurdle decisions?