Simulation Optimization
Simulation optimization is one of the most sophisticated tools in data analytics for business. With simulation optimization, we can create models that include many of the complexities of business decisions. In many ways, these models can be considered to be at the highest level of the analytical process.
Example: An investor wants to invest a $100,000 in 4 assets: bonds, stocks, mutual funds and money market.
Source of uncertainty: Annual return of each asset + other risks such as changes in the economy or major global events
Example: An investor wants to invest a $100,000 in 4 assets: bonds, stocks, mutual funds and money market.
Source of uncertainty: Annual return of each asset + other risks such as changes in the economy or major global events
- Annual return of à uniform distribution between 4% and 6%
- Returns of a stock à lognormal distribution with mean of 11% and a standard deviation of 4%
- Returns of mutual funds à normal distribution with mean of 8% and standard deviation of 1%
- Money market à fixed return of 1%
Negative values represent low risk and values greater than 1 represent high risk.
Problem: How to invest the $100,000 in order to maximize total respective return by staying within the investment limits set by the investor and by not exceeding the total risk factor.
Problem: How to invest the $100,000 in order to maximize total respective return by staying within the investment limits set by the investor and by not exceeding the total risk factor.
