Are Monte Carlo asset returns real or nominal?

In the Monte Carlo/Build Portfolios dialog each asset in 'Asset class' has its "Average Real Return" listed.

But when hitting the 'new' button the 'Define a new asset' screen, question 2, states "Specify average nominal rate of..."

Obviously Nominal != Real but in fact whatever number I enter in the 'Define a new asset' dialog in the question 2 as nominal shows up in the Monte Carlo/Build Portfolios dialog as 'Average Real Return'.

So which is it? Is the number nominal or real? Either one, one of the dialogs has to be wrong so it would be good if that was fixed.


dan royer's picture

There may be some confusion there in the language in the program's user interface. But we ask user's to enter nominal return history (getting the "real return" history would be nearly impossible for most users). Then, we are calculating the real return in a way that will work with our reports which are in "today's dollars." We'll clean this up when we redo this MC user defined assets over the next six months.

Whatever value I enter in the dialog is what is recorded in the access database and what is displayed as the "Average Real Return". So it would not appear that there is any translation. Note that I have the inflation rate set to 3%.

BTW, I should clarify that this only seems to apply to new assets. The values I have given them are anywhere from 0% to 1% nominal returns. They are recorded and displayed with the same value. The same cannot be said for existing assets like REITs (which, btw, are listed twice in the access database) which do have adjusted values. That is, the values listed in the database and the values listed as the real return are not identical. Could this just be an issue with user created assets?

Ahh.... also the dialog for entering the return is confusing on another axis. It says % so one might naively think that entering a 4 means 4%. It doesn't, it means 400%. Sigh... at this point I am just using an access database editor to put my data in directly.

dan royer's picture

This stuff is all being redone in the next release or two. I'm not sure about all the details, but many of these inconsistencies in the user interface will be cleared up. I'll make sure that the programmer sees this exchange. I don't understand the numbers myself.

I tried a simple experiment. I created an asset with a 30% nominal rate of return (the maximum), 0% variance and 0 beta. Basically I want to intentionally short circuit Monte Carlo so that all runs will always produce exactly a 30% nominal rate of return. My inflation rate is set to 3%.

I made this asset 100% of the portfolio and only used that portfolio and nothing else in the simulation.

When I look up the "Monte Carlo Spending Behavior & Portfolio Characteristics" report it lists the Mean Real Rate of Return and the Median Real Rate of Return as -2.621359. That's right, somehow a 30% nominal return turns into a -2.62% real return? Both Portfolio ratios and beta are 0, but that's what I wanted.


I tried 7%/100%/1 and that gave me Mean Real Rate of Return -2.972425, Median Real Rate of Return -4.992661, Portfolio Ratios - 1.082002 & Beta - 1. Again, this asset was 100% of the portfolio.

So I tried one final experiment. I took the numbers in the calculate_relative_variance spreadsheet, the defaults, from the example. E.g. 4.75/8.8%/0.09. When I ran those the report showed the Mean Real Rate of Return = -2.903254, Median Real Rate of Return = -3.090052, Portfolio Ratios = 0.097099 & Beta = 0.09.

What am I screwing up?!?!?! Why are all my returns negative?

I had to open a support ticket to get UDA inputs to work. The manual approach using the input screen and Excel file to determine inputs from past history of asset does not work. You will continually get ROR like -2.9. I had to create my own UDA XML files. If you can, see my trouble ticket at:

According to Darryl Koehler, problems with inputting UDA's will get completely updated and fixed the Q1 of this year. We will see :)

On the old site, there were a number of posts on UDAs (user defined assets). Unless these are defined within strict limits, they will create nonsensical results so it's not surprising that your experiment didn't turn out the way you expected.

Reading between the lines, there may be some additional programming in this area to fix various issues. Dan said above that it is being reworked in the next release or two. UDAs have been tricky for years. My suggestion is to wait on them for the time being until you see a release that directly addresses this area.

Just another user...


Yes, I am also having trouble inputting user defined assets. I am getting errors in program and new asset will not show up until I hit the MC folder to update program. I also see there is a feature under file to "input asset data", but program wants a zip file. UDA part of program needs work. After several ties, I have still not been able to get my UDA's to work. I tried flat 3% rate of return test case, and I got negative returns also.
Any advise would be helpful.

dan royer's picture

The next release (in a few weeks) will address 2 bugs related to UDAs but not the central one which is that they do not behave as expected.

1. The mean return will now show in real terms, so it's consistent.
2. After adding a UDA, it will appear in the list properly.

But several people have found that adding a UDA to a portfolio will drag down the mean return for the portfolio regardless of return rate of the UDA. It's like the CE is treating them just like Cash with a negative return. Our engineer is investigating this particularly cryptic area in the code.

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