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.
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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".