Spreadsheet risk analysis using simulation

Abstract

For many financial models implemented in electronic spreadsheets, input data values frequently are random variables because they are actually estimates of unknown quantities. As a result, the bottom-line performance measure of the model is a random variable, and risk is associated with decisions based upon it due to the uncer tainty in its value. We describe in detail how to evaluate this risk using simulation in a spreadsheet and illustrate the procedure with an example. Formulas for generating random variates from many common distributions using LOTUS 1-2-3 are given, and data analysis considerations are also discussed.