Creating a Histogram in Excel

Method 1: Using the Histogram Tool in the Analysis Tool-Pak. This is probably the easiest method, but you have to re-run the tool each to you do a new simulation. AND, you still need to create an array of bins (which will be discussed below). Method 2: Using the FREQUENCY function in Excel. This is the method used in the spreadsheet for the sales forecast example. One of the reasons I like this method is that you can make the histogram dynamic, meaning that every time you rerun the MC simulation, the chart will automatically update. This is how you do it:
Step 1: Create an array of bins

The figure below shows how to easily create a dynamic array of bins. This is a basic technique for creating an array of N evenly spaced numbers. To create the dynamic array, enter the following formulas: B6 = $B$2 B7 = B6+($B$3-$B$2)/5 Then, copy cell B7 down to B11

Figure 2: A dynamic array of 5 bins. After you create the array of bins, you can go ahead and use the Histogram tool, or you can proceed with the next step.

Step 2: Use Excel's FREQUENCY formula

The next figure is a screen shot from the example Monte Carlo simulation. I'm not going to explain the FREQUENCY function in detail since you can look it up in the Excel's help file. But, one thing to remember is that it is an array function, and after you enter the formula, you will need to press Ctrl+Shift+Enter. Note that the simulation results (Profit) are in column G and there are 5000 data points ( Points: J5=COUNT(G:G) ).

The Formula for the Count column: FREQUENCY(data_array,bins_array) a) Select cells J8:J48 b) Enter the array formula: {=FREQUENCY(G:G,I8:I48)} c) Press Ctrl+Shift+Enter

Figure 3: Layout in Excel for Creating a Dynamic Scaled Histogram. Creating a Scaled Histogram If you want to compare your histogram with a probability distribution, you will need to scale the histogram so that the area under the curve is equal to 1 (one of the properties of probability distributions). Histograms normally include the count of the data points that fall into each bin on the y-axis, but after scaling, the y-axis will be the frequency (a not-so-easyto-interpret number that in all practicality you can just not worry about). The frequency doesn't represent probability! To scale the histogram, use the following method: Scaled = (Count/Points) / (BinSize) a) K8 = (J8/$J$5)/($I$9-$I$8) b) Copy cell K8 down to K48 c) Press F9 to force a recalculation (may take a while)

Step 3: Create the Histogram Chart

Bar Chart, Line Chart, or Area Chart: To create the histogram, just create a bar chart using the Bins column for the Labels and the

Count or Scaled column as the Values. Tip: To reduce the spacing between the bars, rightclick on the bars and select "Format Data Series...". Then go to the Options tab and reduce the Gap. Figure 1 above was created this way. A More Flexible Histogram Chart One of the problems with using bar charts and area charts is that the numbers on the x-axis is actually just labels. This can make it very difficult to overlay data that uses a different number of points or to show the proper scale when bins are not all the same size. However, you CAN use a scatter plot to create a histogram. After creating a line using the Bins column for the X Values and Count or Scaled column for the Y Values, add Y Error Bars to the line that extend down to the x-axis (by setting the Percentage to 100%). You can right-click on these error bars to change the line widths, color, etc.

Figure 4: Example Histogram Created Using a Scatter Plot and Error Bars.

[ Running MC ]

[ Summary Statistics ]