Risk diversification example two projects

As an investor you are offered 2 real estate projects with the characteristics as shown in Table 2.1.

You already have many projects in your portfolio that have moderate but sure returns so you want this project to have a more ambitious return and you are prepared to accept the higher risk involved (risk diversification).

Input the data into the program or open the files [O e_mcs-2.mis]. Press the 'Perform Project Simulation' button to start the simulations.

Running both simulations yields the profit thresholds shown in Figures 2.3 and 2.4. The output is summarised in Table 2.2.

As can be seen from the results, the profit of project A ranges from 4.8% to 8.3% whereas the profit of project B ranges from 3.4% to 10.5%. Project A has a standard deviation of 1.3 whereas project B has a standard deviation of 2.7. This indicates that project B is more risky but could also yield a higher profit. There is a 10% probability that project A will have a profit of more than 8.3% whereas project B has a 10% probability of yielding a profit of more than 10.5%. This means that project B fits better into the current portfolio of projects than project A.

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Figure 2.3 Output illustration of Monte Carlo simulation project A

Figure 2.4 Output illustration of Monte Carlo simulation project B

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