Simulation with Crystal Ball

Close the workbook that has the deterministic model

Run Crystal Ball via Stern Apps
Crystal Ball will “spawn” Excel
Wheel template
 Step 1: Random Input Cells
A random input cell is an input cell that has a random value. Must select a
distribution for the random value.
Crystal Ball refers to each such random input cell as an assumption cell.
Procedure to define an assumption cell:
1. Select the cell by clicking on it (must be a value cell: a number, not a
formula, cannot have the = sign).
2. If the cell does not already contain a value, enter any number into the
cell.
3. Click on the Define Assumption button.
4. Select a probability distribution from the Distribution Gallery.
5. Click OK to bring up the dialogue box for the selected distribution.
6. Use the dialogue box to enter parameters for the distribution (preferably
referring to cells on the spreadsheet that contain these parameters).
Replace the =RAND() formulas in B20:B69 with values.
It doesn’t matter what values; Crystal Ball will randomize them anyway.

A B C D E
16 EMV (1 round)
17
18 Round ~U(0, 1) Outcome Start ROI
19 0
20 1 0.055 1 $100.00 200%
21 2 0.333 1 $300.00 200%
22 3 0.959 3 $900.00 -100%
23 4 0.735 2 $0.00 -100%
24 5 0.106 1 $0.00 200%
 Step 2: Output Cells
Crystal Ball refers to the output of a computer simulation as a
forecast, since it is forecasting the underlying probability
distribution when it is in operation.
Each output cell that is being used to calculate a measure of
performance is referred to as a forecast cell. There is no target cell,
but the forecast cell(s) plays a similar role.
Crystal Ball keeps track of the results in forecast cells.
Procedure for defining a forecast cell:
1.Select the cell.
2.Click on the Define Forecast button in the Crystal Ball tab or
toolbar, which brings up the Define Forecast dialogue box.
3.This dialogue box can be used to define a name and (optionally)
units for the forecast cell.
 Step 3: Run Preferences
Setting run preferences refers to such things as choosing the
number of trials to run and deciding on other options regarding
how to perform the simulation.
This step begins by clicking on the Run Preferences button on the
Crystal Ball tab or toolbar.
The Run Preferences dialogue box has five tabs to set various types
of options.
The Trials tab allows you to specify the maximum number of trials
to run for the computer simulation.
Run Preferences Dialogue Box
Step 4: Run Simulation

Play
Stop
Rewind
Single Step
 Run Simulation
To begin running the simulation, click on the Start Simulation
button. (If a computer simulation has been run previously, you
should first click on the Reset Simulation button to reset the
simulation before starting a new one).
Once started, a forecast window displays the results of the
computer simulation as it runs.
The following can be obtained by choosing the corresponding
option under the View menu in the forecast window display:
–Frequency chart
–Statistics table
–Percentiles table
–Cumulative chart
–Reverse cumulative chart
 A B C D
3 Statistics Strategy 1 Strategy 2 Strategy 3
4 Trials 10000 10000 10000
5 Base Case $0.00 $100.00 $1,708.59
6 Mean $0.00 $15,180,443.65 $78,143.55
7 Median $0.00 $100.00 $2,562.89
8 Mode $0.00 $400.00 $1,139.06
9 Standard Deviation $0.00 $1,107,474,953.65 $920,655.84
10 Variance $0.00 $1,226,500,772,968,280,000.00 $847,607,183,037.89
11 Skewness --- 92.52 48.25
12 Kurtosis --- 8,865.61 2,962.72
13 Coeff. of Variability --- 72.95 11.78
14 Minimum $0.00 $0.00 $0.15
15 Maximum $0.00 $107,374,182,400.00 $64,715,982.49
16 Range Width $0.00 $107,374,182,400.00 $64,715,982.34
17 Mean Std. Error $0.00 $11,074,749.54 $9,206.56
Outcomes Expected Observed
1 50.0% 80.0%
2 33.3% 14.0%
3 16.7% 6.0%
 B C D E F
1 ROI Table (transposed)
2 Prob Strategy 1 Strategy 2 Strategy 3
3 1 0.500 200% 100% 50%
4 2 0.333 -100% -50% -33%
5 3 0.167 -100% -50% 0%
6
7 Correlations
8 Strategy 1 Strategy 2 Strategy 3
9 Strategy 1 1.000
10 Strategy 2 1.000 1.000
11 Strategy 3 0.918 0.918 1.000
 Fixed-Proportion vs. Dynamic Strategy

So far, we have focused on fixed-proportion strategy.

Although it is a multi-period problem, once we fix the strategy at the
beginning, we do not revise it afterwards (although the strategy itself
involves rebalancing).
This is a static strategy!
A dynamic strategy may revise the proportions after each period. But
it is much harder to find an optimal dynamic strategy.
This course starts with static optimization, and will switch to
dynamic optimization later.
 Volatility Bumping
Two assets are available for investment
The stock will either double or reduce by half in each period, each
with 50% probability
The other just retains value
What is the strategy that maximizes the single-period expected
return?
What if you want to maximize the long-term expected return?
How about two stocks (with independent returns)?