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Monte Carlo Simulation

Monte Carlo simulation is a technique that uses random numbers and probability distributions to simulate real-world processes. It involves setting up probability distributions for the variables being analyzed, building cumulative probability distributions for each variable, generating random numbers to assign values to each variable, running the simulation experiment by sampling randomly, repeating this process for the required number of runs, and analyzing the results. As an example, a computer store manager uses Monte Carlo simulation to determine the optimal number of laptops to order each week by simulating past sales data over 15 weeks using random numbers.

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141 views6 pages

Monte Carlo Simulation

Monte Carlo simulation is a technique that uses random numbers and probability distributions to simulate real-world processes. It involves setting up probability distributions for the variables being analyzed, building cumulative probability distributions for each variable, generating random numbers to assign values to each variable, running the simulation experiment by sampling randomly, repeating this process for the required number of runs, and analyzing the results. As an example, a computer store manager uses Monte Carlo simulation to determine the optimal number of laptops to order each week by simulating past sales data over 15 weeks using random numbers.

Uploaded by

Chayan Sen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Monte Carlo Simulation

The principle behind the Monte Carlo


simulation technique is representative of the
given system under analysis by a system
described by some known probability
distribution and then drawing random
samples from probability distribution by
means of random numbers.
Random numbers between 00 and 99 are
used to obtain values of random variables
that have a known discrete probability
distribution in which the random variables of
interest can assume one of a finite number of
different values.
The Monte Carlo simulation steps
1. Setting up a probability distribution for variables to be
analysed.
2. Building a cumulative probability distribution for each
random variable.
3. Generate random numbers. Assign an appropriate set of
random numbers to represent value or range (interval) of
values for each random variable.
4. Conduct the simulation experiment by means of random
sampling
5. Repeat step 4 until the required number of simulation
runs has been generated
6. Design and implement a course of action and maintain
control
Example
The manager of computer world, a store that
sells computers and related equipment, is
attempting to determine how many laptops
the store should order each week. A laptop
sells gives the profit of Rs. 4300. The number
of laptop demanded each week ranges from 0
to 4.
From past sales records, the manager has
determined probability of demand for laptops
for the past 100 weeks.
Demand: 0 1 2 3 4
Frequency: 20 40 20 10 10
Simulate the demand of 15 weeks from the
following random numbers: 39, 45, 72, 53, 37,
02, 87, 98, 10, 47, 93, 21, 95, 15, 69.

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