Random Asset Returns
Overview
The greatest challenge for retirement planning is forecasting asset returns.
Workers save their money by buying assets, which may include
stocks,
bonds
and/or
houses.
There are no easy ways to forecast asset returns.
The standard method to do so within the context
The effects of compounding
can magnify random fluctuations in asset returns.
Brownian Bridge
Simulations
The mathetical complexities of deriving a portfolio distribution given a set of assumptions about
random asset returns can be daunting. The typical way to deal with these challenges is to encode
the assumptions into a
simulation
and then running the simulation many times in order to build a distribution.
