Niels Bohr, the Nobel laureate in physics, said ironically: "Making predictions is very difficult, especially if it’s about the future". Predicting the future is impossible.
However, we can simulate thousands of possible and probable future market scenarios, based on the behavior of financial markets observed in the past.
Then, by grouping these simulations, we can look at the top 10% of simulations that return the best performance: this is the scenario we call “strong market”. In other words, we estimate that there is a 10% chance that the final return will be higher than this scenario. It is an optimistic scenario.
We also look at the 10% of scenarios that return the worst performance. This is the pessimistic “poor market” scenario. We estimate that there is a 10% chance (or bad luck) that the return actually obtained is below this scenario.
Finally, we look at the median scenario, the one that is in the middle of all the others. This is the “normal market” scenario. We believe this is the most likely scenario to materialize.
Last updated on 19/10/2022