Wall Street Journal

May 2, 2009

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There is no standard Monte Carlo approach, but the method is nothing

new. It was used during World War II to help develop the atomic bomb.

By the late 1990s some financial-services firms, like T. Rowe Price

Group Inc., had introduced Monte Carlo tools aimed at individuals.

If one had asked a financial adviser 18 months ago for retirement-

planning guidance, there is a good chance he would have run a "Monte

Carlo" simulation. This calculation method, as it is commonly used in

financial planning, estimates the odds of reaching retirement

financial goals.

But there is little chance your Monte Carlo simulation, named for the

gambling mecca, would have highlighted a scenario like the market

slide just seen. Though these tools typically run a portfolio through

hundreds or thousands of potential market scenarios, they often assign

minuscule odds to extreme market events. Yet these extreme events seem

to be happening more often.

Some industry participants and academics are pushing to improve the

Monte Carlo tools' ability to highlight the risk of major market

slides.

My comment: the standard deviation of daily stock market returns

varies drastically over time, by perhaps a factor of 8 -- annualized

volatility of daily returns has ranged from 10% to 80% (experienced in

October and November 2008), as is reflected by the VIX index. To be

more realistic, Monte Carlo simulations should incorporate "stochastic

volatility".