Monte Carlo simulation is one of the most famous and widely applied finance techniques. This is a tool that helps us deal with uncertainty in complex situations.

It steps on the premise that one of the best ways to deal with multiple uncertain variables is to generate a large number of random observations for each of them. So, you can create a joint distribution of the different possible outcomes, resulting from the combination of the random variables.

This technique is preferred by analysts who would like to gain an understanding of the different possible realizations that could be obtained through a given distribution function.

Another related topic you might be interested to explore is Binomial trees.

This is an open-access Excel template in XLSX format that will be useful for anyone who wants to work as a Statistician, Business Intelligence Analyst, Data Scientist, Portfolio Manager, or Risk Manager.

You can now download the Excel template for free.

Monte Carlo Simulation is among the topics included in the Quantitative Methods module of the CFA Level 1 Curriculum.