A 5-minute guide to Monte Carlo simulation using @Risk

To start @Risk: in Windows, Start Programs Palisade Decision Tools - @Risk 3.5 for Excel (32 bit) click Enable acros (click Enable acros again with the hourglass, otherwise ou!ll wait "ore#er$% &otice the new tool 'ars in ()cel these are *ro#ided ' @Risk, which is an ()cel +add-in,-

.te* /: 0e"ine the model (in*uts and out*uts%

1ere we in*ut the distri'ution t *e o" each R2, and the relationshi* 'etween them()am*les: in a cell, ou can t *e in (case-insensiti#e% an o" the "ollowing: =RiskNormal( , ) "or a normal R2 with mean and standard de#iation 3 =RiskLogNorm( , ) "or a log-normal R2 with mean and standard de#iation 3 =RiskDiscrete({x1,x2,},{w1,w2,}) "or a discrete R2 whose outcomes are x1,x2,, with relati#e likelihood w1 : w2 : (note: no need to normali4e the weights%3 =RiskExpo (!"2) "or an e)*onential R2 with mean 5-63 etc(7se @Risk!s !el" Distrib#tion to see all distri'ution t *es- Remem'er the +R8.9, *re"i) in "ront o" all these distri'utions% &ote: the *arameters o" a distri'ution (e-g- the mean o" an R2% can 'e re"erences to other cells what a**ears in the cell ma 'e :ust the mean #alue, don!t worr as the simulation hasn!t started et it!s a good ha'it to gi#e our num'ers some descri*tion headings, which will 'e used automaticall in the re*orts generated ' @RiskA"ter de"ining all the +in*ut, random #aria'les, de"ine the out*ut(s% as a "unction o" the in*ut #aria'les- Then click the out*ut cell(s% and the +Add;as @Risk out*uts, 'utton (red down arrow%A"ter all this is done, ou can click the dou'le red-'lue arrow to see a listing o" all the in*uts and out*ut(s% ou ha#e de"ined, and the detailed contents in each cell- The @Risk window a**ears, and dis*la s the +8n*uts ' <ut*uts, chart- =ou can hide the @Risk window and go 'ack to the normal ()cel window ' clicking the +1ide, 'utton To correlate #aria'les, in the @Risk window click +Correlate, 'utton- The correlation matri) a**ears- Click the corres*onding entries and enter i: (a num'er "rom / to /%-

.te* 6: >er"orm the simulation:

8n @Risk #iew, click the .im(ulation% .ett(ings% 'utton- =ou can ad:ust the "ollowing: ? o" iterations (i-e- how man times to recalculate the whole s*readsheet using a di""erent set o" random num'ers% @ (t *ical #alue: sa 555%, ? o" simulations (usuall one% .am*ling: Aatin 1 *ercude ("aster con#ergence than Monte Carlo% or Monte Carlo3 Random &um'er Benerator .eed (5 to ha#e trul random seed using the clock3 or others i" ou need to ha#e the same set o" out*uts e#er time%3 .tandard Recalc (Choosing Ex"ected $al#e will alwa s show means o" distri'utions in the cells3 onte %arlo allows ou to see the u*dated simulation results in the ()cel s*readsheet% Con#ergence: &#to'Sto" is hel*"ul i" ou don!t know how man iterations ou should runCthis o*tion tells the simulation to sto* once the num'ers (e-g- mean and standard de#iation o" the R2s% 'ecome sta'le at the le#el o" con#ergence ou s*eci" When all things are set, click the .imulate (with red >0D icon% 'utton$ 8" ou are in the ()cel #iew ou can see the actual random num'ers change-

.te* E: Reading and gra*hing the results

When the simulation is "inished, ou see two windows (u**er and lower%: 7**er window: The Res#lts Re"ort: shows the minFma)Fmean o" each in*ut and out*ut during this simulation Aower window: The Stats. Re"ort: shows more detailed statistics (e-g- Gtile #alues, mean, #ariance, skewness, etc-% o" the in*ut and out*ut R2s- HHH =ou can s*eci" x #alues "or +Target ?/ @,, etc- to de"ine e#ents and see the associated *ro'a'ilities >(R2 x% 8" ou want to see all the raw data, click +0ata, 'utton in u**er window=ou can also co* the results to ()cel: use *ull-down menu!s res#lts ( re"orts to )orks*eet (check whate#er it is ou want to e)*ort to ()cel%

To gra*h a distri'ution "or a simulated R2, :ust click and highlite, sa , the +&et winnings, column "or our gam'ling e)am*le, and then click the Bra*h 'utton with a red histogram- =ou can "ormat the gra*h ' right-clicking on itRemem'er that ou will usuall need to e)*ort the stats to an ()cel worksheet and do some "urther work 'e"ore su'mitting the num'ers-