Say I have 6 possible investment options with the following probability of success and the corresponding returns:
| Investment | Probability of Success | Return | | I1 | 0.5 | 2x | | I2 | 0.3 | 6x | | I3 | 0.1 | 10x | | I4 | 0.06 | 20x | | I5 | 0.02 | 40x | | I6 | 0.02 | 40x |
What I wish to know what is the best 'investment portfolio' (i.e., the one with the least risk - i.e., there is not cut-off for least anything would do for now). I wish to 'simulate' such a portfolio and its expected return, for the investment. I don't know if it's possible but I'm trying to see if it answers some questions:
- If the initial investment capability is $100,000 how should I go about investing in these options i.e., how much to invest in which option so that I do end up with 'some' profit with minimal risk of loss?
- If it's not possible to do the above using a simulation then is it possible to 'see' what would be an optimal portfolio? i.e., where all to invest?
- If neither of the above are possible then what is the best way of simulating such a scenario to gauge the 'risk of investment'?
I basically want a graphical view of how things would look like i.e., the risk of such an investment. I'd like to simulate this in Excel using Monte-Carlo, but I just can't seem to understand 'what' to do so as to observe the associated risk with the portfolio or what would form a good portfolio with minimal risk.
UPDATE: At any given point in time ONLY ONE investment will be a success since only 1 of the options can happen at time 't'. So if I invest \$1 in each initiative and it's I1 that comes out the winner, I'll land up with \$2 but a net loss of \$4. Implying a bad investment. But at the same time I could land up with \$40 too but with a very low probability. I basically wish to simulate something like that to see if it's even 'worth it' - basically a visual cue/proof of the same.