Use Monte-Carlo simulation for this case (in Excel, Crystal Ball, @Risk, or Python)

Sample Solution

In the Monte Carlo assignment, the terms "increments for HF" and "Protection Level" refer to two key parameters used to simulate different scenarios and assess risk exposure.

Increments for HF:

• HF stands for "High Five": It refers to the maximum potential loss, expressed in monetary terms, that you are concerned about within a defined period.
• Increments: These are the different values chosen for HF in your simulation. By varying the HF in $100 increments ($1,000, $1,100, etc.), you are essentially exploring a range of possible maximum loss scenarios.
• Purpose: By running simulations with different HF values, you can understand how the probability of exceeding that maximum loss changes. This helps assess the risk involved in your financial situation or investment.

Protection Level:

• Protection Level: This represents the percentage of the HF that you aim to protect against through some risk management strategy (e.g., insurance,

Full Answer Section

• diversification).
• Possible values: The provided range of 0% to 110% allows you to explore different levels of protection, including overprotection (protection level exceeding 100%).
• Purpose: By simulating scenarios with different protection levels, you can evaluate the effectiveness of your risk management strategies. Analyzing the probability of exceeding the expected loss under different protection levels helps determine if your current approach is adequate or if adjustments are needed.

Choosing Relevant Alternatives:

While numerous options exist for both HF and protection level, you don't need to test all of them. Here's how to select relevant alternatives:

HF:

• Consider your financial situation and potential risks. Choose HF values that represent realistic maximum losses you might encounter.
• You may not need to simulate every $100 increment. Focus on a range that reflects your risk tolerance and potential concerns.

Protection Level:

• Analyze your current risk management strategies and their effectiveness. Consider protection levels aligned with your risk tolerance and financial goals.
• It's important to include "no protection" (0%) and "full protection" (100%) scenarios as benchmarks.
• You can explore additional levels to evaluate different degrees of protection, but avoid values far exceeding 100% as they are not practically achievable.

By using your judgment and tailoring these parameters to your specific situation, you can select around 10-20 relevant alternatives for each variable, creating a simulation that accurately reflects your risk concerns and helps you make informed decisions.