Monte Carlo Simulation is a planning technique commonly used to calculate the percentage probability of retirement portfolio depletion rate based on the portfolio’s expected return and risk.  Wealth planners use this technique to verify the likelihood of their clients will have enough saving to live on for life.  The key parameters of retirement plan simulation are interest rate, portfolio return and risk, client age, planned retirement age and life expectancy.  Then, the simulation runs thousands of possible outcomes using historical financial data. 

Portfolio optimization is based on Markowitz’ Modern Portfolio Theory.  The optimization process considers assets’ return, assets’ risk and assets price correlation and the output of the portfolio optimization is the optimal weightings of each asset so that the portfolio has the highest return for the least risk. Central to the optimization is the construction of the Covariance matrix for the assets in the portfolio. 

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