12/05/2023

Predictive Modeling with Monte

Carlo Simulations in Excel
MAY 10, 2023

Agenda
1. Why use Monte Carlo analysis?
2. Modeling randomness
3. A simple dice game
4. Modeling cumulative density functions (i.e., probabilities)
5. Brute-force Monte Carlo method
6. Elegant Data Table Monte Carlo method
7. When and how to use Visual Basic for Monte Carlo
8. How to learn more

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 12/05/2023

Agenda
1. Why use Monte Carlo analysis?
2. Modeling randomness
3. A simple dice game
4. Modeling cumulative density functions (i.e., probabilities)
5. Brute-force Monte Carlo method
6. Elegant Data Table Monte Carlo method
7. When and how to use Visual Basic for Monte Carlo
8. How to learn more

Why Use Monte Carlo Analysis

• While average outcomes are easier to model, it is often
essential to understand the distribution of outcomes,
including best and worst-case scenarios
• Risk can be mitigated in bad scenarios, while new
opportunities (real options) can be leveraged in good
scenarios
• Incorporating randomness provides modeling discipline,
an analysis of risk, and more realistic projections
(depending on the distributional assumptions)

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 12/05/2023

Agenda
1. Why use Monte Carlo analysis?
2. Modeling randomness
3. A simple dice game
4. Modeling cumulative density functions (i.e., probabilities)
5. Brute-force Monte Carlo method
6. Elegant Data Table Monte Carlo method
7. When and how to use Visual Basic for Monte Carlo
8. How to learn more

Modeling Randomness
• What are the most important uncertainties in your
model?
• Examples: Revenue, Stock Returns, Input Costs
• How does that uncertainty behave?
• Normal distributions are convenient to work with,
but don’t always fit reality
• We can easily generate uniform random numbers
• We then transform them into Cumulative Density
Functions (CDFs) using probability distributions

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 12/05/2023

Agenda
1. Why use Monte Carlo analysis?
2. Modeling randomness
3. A simple dice game
4. Modeling cumulative density functions (i.e.,
probabilities)
5. Brute-force Monte Carlo method
6. Elegant Data Table Monte Carlo method
7. When and how to use Visual Basic for Monte Carlo
8. How to learn more

To the Excel Model!

Let’s get to modeling!

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 12/05/2023

Agenda
1. Why use Monte Carlo analysis?
2. Modeling randomness
3. A simple dice game
4. Modeling cumulative density functions (i.e., probabilities)
5. Brute-force Monte Carlo method
6. Elegant Data Table Monte Carlo method
7. When and how to use Visual Basic for Monte Carlo
8. How to learn more

Learning More
• Watch this content again, download the file I worked through,
and learn about Monte Carlo using VBA on my YouTube at:
https://www.youtube.com/channel/UCHbmhzlXTBYFHGtyUkqw
QRA
• Monte Carlo Playlist:
https://www.youtube.com/playlist?list=PL7zo_gA9cuyIX01Mb4u
ozdcGD7ltN5AZ4
• Join the Microsoft Excel Collegiate Challenge:
https://www.fmworldcup.com/microsoft-excel-collegiate-
challenge/

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 12/05/2023

Learning More

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Bio and Contact Information

David Brown (dcbrown@arizona.edu) is an Associate Professor of Finance
in the Eller College of Management at the University of Arizona. David's
research covers topics including institutional investors and asset
management, retirement tax planning, early-stage financing through
crowdfunding and IPOs, and price feedback and the informativeness of
price for firm decision making. His research has been published in the
Review of Financial Studies, the Journal of Financial Economics and the
Review of Finance and was recognized with the 2018 TIAA Paul A.
Samuelson Award for Outstanding Scholarly Writing on Lifelong Financial
Security. David's research has also been featured by the Wall Street
Journal, Bloomberg, Forbes, Consumer Reports, Money Digest and
ValueWalk. David has taught financial modeling at the graduate and
undergraduate levels, was a finalist in the 2016 ModelOff Financial
Modeling World Championships and was featured as an Excel Esports All-
Star on ESPN2. In 2021, David was a named a Top-50 Business Professor by
Poets & Quants. He is the founder of the Microsoft Excel Collegiate
Challenge and the Financial Modeling University Championships. Prior to
academia, David worked in high-frequency algorithmic trading and
private student lending.

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