Corporate Valuation for Portfolio Investment: Analyzing Assets, Earnings, Cash Flow, Stock Price, Governance, and Special Situations

APPENDIX J

Monte Carlo Simulation for Security Investments

THE DUFF & PHELPS February 2009 Valuation Report to the Congressional Oversight Panel (see Appendix D) included a section on Monte Carlo simulation in a technical appendix.¹ The first three paragraphs of Appendix J are taken from that section of the Duff & Phelps report. The remainder of this appendix reports on a text run by the authors.

Monte Carlo simulation was developed by scientists working on the Manhattan Project in the 1940s. The essence of the idea is to repeat a process many times, observe the outcome, and use that information to calculate the answer sought. Consider this simple example. A person wants to know what the odds are for each value for the sum of the throw of two ...