Rate of Return vs Mean Rate: which used for which projections?

Rate of Return vs Mean Rate: which used for which projections?

• A. Monte Carlo; Straight-line
• B. Straight-line cash flow projections; Monte Carlo
• C. Both for straight-line
• D. Both for Monte Carlo

Answer: (B)

In cash-flow projections, how you treat returns drives the modeling method. A straight-line projection uses a fixed rate of return, applied consistently each period, so the rate of return is the key input shaping the entire schedule. Monte Carlo, by contrast, introduces uncertainty by sampling from a distribution of possible returns, centered on a mean rate. The mean rate provides the central value around which those simulations vary, with randomness capturing possible outcomes. So the fixed rate goes with straight-line projections, while the mean rate underpins the scenarios in Monte Carlo.

In cash-flow projections, how you treat returns drives the modeling method. A straight-line projection uses a fixed rate of return, applied consistently each period, so the rate of return is the key input shaping the entire schedule. Monte Carlo, by contrast, introduces uncertainty by sampling from a distribution of possible returns, centered on a mean rate. The mean rate provides the central value around which those simulations vary, with randomness capturing possible outcomes. So the fixed rate goes with straight-line projections, while the mean rate underpins the scenarios in Monte Carlo.