Financial Modeling with Crystal Ball and Excel, + Website, 2nd Edition

CHAPTER 2

Analyzing Crystal Ball Forecasts

In this chapter, using an example of accumulating funds for retirement, we see the graphical and numerical summaries of forecasts that Crystal Ball provides automatically. This chapter serves as a review of elementary statistical analysis, focused on the standard output built into Crystal Ball.

2.1 SIMULATING A 50–50 PORTFOLIO

Let’s say that you want to start saving for your retirement. You are 30 years old and wish to retire at age 60. You plan to put away an inflation-adjusted $10,000 per year, and would like to know how much wealth you will have accumulated after 30 years. At this point, you consider only two types of assets: stocks and bonds.

If you had perfect foresight you would know exactly what returns each investment would bring over the next 30 years. With that information, you wouldn’t need Crystal Ball and could optimize your portfolio by investing in only those assets that you knew would go up. Of course, no one has perfect foresight, so what do you do? In this chapter, we’ll consider a simple model for investing retirement funds and use it to illustrate how to analyze Crystal Ball forecasts.

2.1.1 Accumulate.xls

Overview. For this model we assume that returns on stocks and bonds during the next 30 years will resemble (in a statistical sense) returns that have been observed during the years 1926 to 2010. You have heard that diversification is a good thing to do when investing your money, so you decide initially to split ...