Accumulate.

xls

Allocations Year 30 Wealth

Stocks 50% $ 3,409,078
Bonds 50%
Amount $ 10,000

Inflation Rate 3%

Accumulated Values
Stock Bond
YEAR Return Return Beg Stock End Stock Beg Bond End Bond Total
1 1.1461 1.0593 $ 5,000 $ 5,730 $ 5,000 $ 5,296 $ 11,027

2 1.1461 1.0593 $ 10,880 $ 12,470 $ 10,446 $ 11,066 $ 23,535

20 1.1461 1.0593 $ 580,605 $ 665,417 $ 231,830 $ 245,571 $ 910,988
21 1.1461 1.0593 $ 674,448 $ 772,968 $ 254,602 $ 269,692 $ 1,042,660
22 1.1461 1.0593 $ 782,270 $ 896,540 $ 278,993 $ 295,529 $ 1,192,069
23 1.1461 1.0593 $ 906,120 $ 1,038,482 $ 305,110 $ 323,193 $ 1,361,675
24 1.1461 1.0593 $ 1,048,350 $ 1,201,488 $ 333,061 $ 352,802 $ 1,554,290
25 1.1461 1.0593 $ 1,211,652 $ 1,388,644 $ 362,966 $ 384,479 $ 1,773,123
26 1.1461 1.0593 $ 1,399,113 $ 1,603,489 $ 394,948 $ 418,356 $ 2,021,845
27 1.1461 1.0593 $ 1,614,272 $ 1,850,077 $ 429,139 $ 454,574 $ 2,304,651
28 1.1461 1.0593 $ 1,861,183 $ 2,133,056 $ 465,680 $ 493,281 $ 2,626,337

29 1.1461 1.0593 $ 2,144,496 $ 2,457,753 $ 504,721 $ 534,635 $ 2,992,389

30 1.1461 1.0593 $ 2,469,536 $ 2,830,274 $ 546,418 $ 578,804 $ 3,409,078

Use 813 as Seed with Latin Hypercube Sampling (sample size 500) to reproduce images in book.

Forecast cell statistics:

Trials #ADDIN?
Mean #ADDIN?
Median #ADDIN?
Mode #ADDIN?
Standard Deviation #ADDIN?
Variance #ADDIN?
Skewness #ADDIN?
Kurtosis #ADDIN?
Coeff. of Variability #ADDIN?
Minimum #ADDIN?
Maximum #ADDIN?
Range #ADDIN?
Mean Std. Error #ADDIN?

Overview
For this model we assume that returns on stocks and bonds during
the next 30 years will resemble (in a statistical sense) the returns that
have been observed during the years 1926 to 2004. You have heard that
diversification is a good thing to do when investing your money, so you
decide initially to split the money you want to set aside for retirement each
year by putting one half into stocks and one half into bonds. We call this
the 50–50 portfolio, and model it.

Forecast. You want to see the possible distribution of wealth you will have
accumulated after 30 years—Year 30 Wealth. Cell D4 has the formula
=H41 to get Year 30 Wealth displayed near the top of the spreadshee

Stochastic assumptions. Cells B12:B41 represent the total annual return on

stocks for years 1 through 30. Each year’s return on stocks is lognormal
with mean 1.1517 and standard deviation 0.2746. Cells C12:C41 represent
the total annual return on bonds for years 1 through 30. Each year’s return
on bonds is lognormal with mean 1.0585 and standard deviation 0.0735. In
this model, all assumptions are statistically independent of each other (that
is, all correlations are zero).

Decision variable. The sole decision variable in this model is Cell B4, the proportion
of each year’s investment that is allocated to stocks. The proportion
allocated to bonds is calculated in Cell B5 as =1–B4 to ensure that the
entire investment is put into either stocks or bonds each year. The initial
proportion allocated to stocks is 50 percent.
Summary. Figure 1shows the frequency view of a forecast chart for Year 30
Wealth obtained after running the simulation for 10,000 trials. Note that
the distribution is highly skewed to the right because of a few instances of
very high returns over the 30-year period.

Figure 1: Any comments on this chart?

Frequency chart
Cumulative Frequency chart
Change the forecast window by clicking on Preferences, Forecast. . ., then selecting
Cumulative Frequency in the View field and clicking OK. You may also click on
View→Cumulative Frequency in the top menu of the forecast window
trials fell into each interval or below

Statistics View
Descriptions of the statistics computed automatically by Crystal Ball
If you wish to calculate statistics for selected values of the forecast, click on
Preferences, Forecast..., then the Filter tab. You will be able to include or
exclude any specified range of values from the calculations. This feature will
come in handy later for calculating expected tail loss

Forecast Window Percentiles View

The percentiles view in Figure below gives the forecast values that are just larger than
the corresponding percent of all the values. For example, the 80th percentile for
Year 30 Wealth is $4,985,234. This means that 80 percent of the forecast values
were less than that amount, while 20 percent were greater than that amount
 (Percent)
YEAR Stocks
1926 5.95
1927 29.80
1928 41.65
1929 -29.89
1930 -31.53
1931 -46.55

1932 -6.79
1933 98.43

1934 11.39
1952 10.70
1953 -3.74
1954 56.60
1955 26.00
1956 5.42
1957 -12.68
1958 54.13
1959 14.18
1960 -1.41

1961 29.49
1962 -10.32
1963 23.19
1964 20.00
1965 27.10
1966 -8.54
1967 53.78
1968 23.52
1969 -16.78
1970 -6.71
1971 15.41
1972 11.71
1973 -22.78
1974 -23.21
1975 45.01
1976 40.61
1977 9.10
1978 15.01
1979 30.95
1980 36.15
1981 4.49
1982 24.71
1983 31.09
1984 -0.20
1985 28.41
1986 12.66
1987 -2.04
1988 19.84
1989 20.84
1990 -12.37
1991 37.59
1992 15.51
1993 15.49
1994 2.21
1995 35.95
1996 20.35
1997 28.07
1998 10.64
1999 25.42
2000 -6.35
2001 5.45
2002 -17.69
2003 44.70
2004 14.63
2005 6.43
2006 7.44
2007 18.84
2008 -49.39
2009 41.15
2010 12.46
(Continue )
VARYING THE ALLOCATIONS

We started with a simple example of allocating 50 percent to each type of fund,

which we call the 50–50 portfolio. Now we will compare forecasts for different
allocations of stocks and bonds to the portfolio.

Decision Table Tool

In file Accumulate.xls, select cell B4, then click on Define > Define Decision. . .. Fill
in the fields in the Define Decision Variable dialog as shown in Figure 5. Click
OK and watch cell B4 turn yellow to indicate that a Crystal Ball decision variable is
defined there. After this definition, you can use the Decision Table tool to vary the
allocation into stocks from 10% to 90% in steps of 10%.
Click on More Tools > Decision Table. . .. In the Specify target (step 1 of 3)
dialog, Year 30 Wealth will be the only forecast listed (Figure 5b), so click Next >.
In the Select one or two decisions (step 2 of 3) dialog, Stocks will be the only
available decision variable. Move this rightward to the Chosen Decision Variables
window by clicking >> (Figure 5c), then click Next >.

The Specify options (step 3 of 3) dialog should look like Figure 5 Specify
2000 trials as shown in Figure 5 and click Start. Crystal Ball will run 2,000 trials
for each of the nine allocations.
When Crystal Ball finishes its decision table analysis, you should see a new
worksheet with nine Crystal Ball forecasts in cells B2:J2. The value in each cell
is the mean of the forecast for Year 30 Wealth for the corresponding allocation to
stocks that appears in Row 1 of the worksheet.
Figure 5
Trend chart

Select cells B2:J2, then click Trend Chart. Your trend chart should look like that
depicted in Figure7 which clearly shows how the risk and expected reward
increases as you increase your allocation to stocks.

The slopes of the lines connecting each of

these percentiles provide insight into the behavior of the wealth distribution as we
vary the portfolio allocations to stocks and bonds
Overlay chart
In the worksheet created by Crystal Ball’s decision table analysis, select cell F2,
then hold down the Ctrl Key and click on cell J2. Next, click on Overlay Chart.
Use the hot keys Ctrl-t and Ctrl-d to make your chart look like that in Figure 8
which compares the risk profiles of a 50–50 portfolio to a 90–10 portfolio
The
risk profiles are line graphs depicting the probability on the vertical axis that each
portfolio yields a Year 30Wealth greater than the corresponding monetary value on
the horizontal axis.
Figure 8 Figure 9
(Percent) Total Returns
Bonds Stocks Bonds
6.84 1.0595 1.0684
6.96 1.2980 1.0696
1.29 1.4165 1.0129
4.23 0.7011 1.0423
6.45 0.6848 1.0645
-3.16 0.5346 0.9684

12.16 0.9321 1.1216

4.05 1.9843 1.0405

10.96 1.1139 1.1096

2.10 1.1070 1.0210
3.43 0.9626 1.0343
5.09 1.5660 1.0509
-0.49 1.2600 0.9951
-4.27 1.0542 0.9573
8.00 0.8733 1.0800
-3.20 1.5413 0.9680
-1.21 1.1418 0.9879
11.54 0.9859 1.1154

2.55 1.2949 1.0255

6.80 0.8969 1.0680
1.68 1.2319 1.0168
4.11 1.2000 1.0411
0.42 1.2710 1.0042
2.85 0.9147 1.0285
-4.37 1.5378 0.9563
2.28 1.2352 1.0228
-4.63 0.8323 0.9537
15.78 0.9329 1.1578
10.99 1.1541 1.1099
6.04 1.1171 1.0604
1.55 0.7722 1.0155
2.33 0.7679 1.0233
10.56 1.4501 1.1056
16.09 1.4061 1.1609
0.81 1.0910 1.0081
0.75 1.1501 1.0075
-0.44 1.3095 0.9956
-0.93 1.3615 0.9907
3.36 1.0449 1.0336
37.34 1.2471 1.3734
4.77 1.3109 1.0477
15.45 0.9980 1.1545
27.13 1.2841 1.2713
19.84 1.1266 1.1984
-0.03 0.9797 0.9997
8.82 1.1984 1.0882
15.88 1.2084 1.1588
7.56 0.8764 1.0756
18.22 1.3759 1.1822
8.21 1.1551 1.0821
14.22 1.1549 1.1422
-6.22 1.0221 0.9378
25.22 1.3595 1.2522
0.86 1.2035 1.0086
12.39 1.2807 1.1239
11.34 1.1064 1.1134
-6.06 1.2542 0.9394
15.65 0.9365 1.1565
7.32 1.0545 1.0732
15.70 0.8231 1.1570
3.04 1.4470 1.0304
6.49 1.1463 1.0649
2.06 1.0643 1.0206
5.25 1.0744 1.0525
4.09 1.1884 1.0409
-5.53 0.5061 0.9447
19.90 1.4115 1.1990
15.62 1.1246 1.1562