Monte Carlo Simulation on Long / Short Equity

[TinaYJ.Liu]

Hi,
Does any body have any idea or examples that you can show me on wrting
a program in Excel that does the Monte Carlo Simulation for Long /
Short Equity?
I would have all the stocks in the Russell 3000 and the beta of each
stock. I would also have the price for each stock at the beginning
and at the end of the month. I am constraining my maximum long to be
50 positions, equally weighted. The Shorts can be flexible, but let's
say I want 50 shorts that make the beta neutral on a portfolio level.
I guess I should use a random generator function that labels 50 stocks
long and 50 stocks short and see how the returns at the end of the
month turn out. But I really have no clue where to start. Do I need
any other variables or specify distributions? Can someone show me
some examples or code?

Thanks so much in advance.

 

[Joel]

This problem can be very complex. Monte Carlo predictions is based on a
model. You have to build that model using the VBA. You have to set up some
rules before you start. You have to determine how long you plan to keep each
stock. Is this length of time going to be random Distribution, Normal
distribution, or is the buying and selling going to be based other criteria.

What you really need to do is run some experiments. I would build a model
and test it over theh last 5 years to see how well the model behaves compare
to actual results. Then when you perfect the model use it as a prediction
for future investments.

 

[Joel]

I been thinking about your program and have some additional comments. You
have a good sttart of defining a model for your problem. Wat you descibe
below is not a Monte carlo simulation, but really a general purpose
simulation. Monte Carlo simulation usually refers to randomly changing
multiple parameterrs simultaneously.

To perform Monte Carlo Simulation you would randomly select 40-60 short
term and long term stocks rather than to use a fix number. Also you could
have a variable number of months when you update your Portfolio. this would
make you model truely Monte Carlo.

First start simple.
1) Write a program that selects stocks to track.
2) Track the stocks for a fixed period of time and calculate the value of
the portfolio after each time period. It looks like you arre going to do
this monthly.
3) Generate Rules for buying and selling stocks into the program. Include
cost of buying and selling. Make the time for updating variable so you can
run differentt simulation models.