Monte Carlo Simulation
Tom has $5,000 he would like to invest for his son’s first year of college. His son is now 8, so Tom has 10 years before he’ll need to use the money. Tom wants to invest the money and any gains, but won’t be contributing any additional funds out of pocket. He’s exploring the stock market and treasury bills. The returns for stocks and T-bills are normally distributed. Mean and standard deviation of annual returns for each option are shown in Table A.
He thinks a mix of these investments will yield the best outcome. He wants to choose between two options shown in Table B. (These are the only options to be explored for this problem.)
Build a model to track Tom’s returns on this investment over 10 years. (Annual gains should be reinvested, meaning any gains from Year 1 should be added to the investment amount for Year 2).
Build a 2-variable Data Table to show 1000 iterations of the model to compare the results of these two options.
After completing the data table, use statistical analysis to evaluate the results required in Table C below.