what is stochastic modeling 
stochastic modeling is a form of financial model that is used to help make investment decisions this type of modeling forecasts the probability of various outcomes under different conditions using random variables stochastic modeling presents data and predicts outcomes that account for certain levels of unpredictability or randomness companies in many industries can employ stochastic modeling to improve their business practices and increase profitability in the financial services sector planners analysts and portfolio managers use stochastic modeling to manage their assets and liabilities and optimize their portfolios understanding stochastic modeling constant vs changeableto understand the concept of stochastic modeling it helps to compare it to its opposite deterministic modeling deterministic modeling gives you the same exact results for a particular set of inputs no matter how many times you recalculate the model here the mathematical properties are known none of them is random and there is only one set of specific values and only one answer or solution to a problem with a deterministic model the uncertain factors are external to the model stochastic modeling on the other hand is inherently random and the uncertain factors are built into the model the model produces many answers estimations and outcomes like adding variables to a complex math problem to see their different effects on the solution the same process is then repeated many times under various scenarios who uses stochastic modeling stochastic modeling is used in a variety of industries around the world the insurance industry for example relies heavily on stochastic modeling to predict how company balance sheets will look at a given point in the future other sectors industries and disciplines that depend on stochastic modeling include stock investing statistics linguistics biology and quantum physics a stochastic model incorporates random variables to produce many different outcomes under diverse conditions an example of stochastic modeling in financial servicesstochastic investment models attempt to forecast the variations of prices returns on assets roa and asset classes such as bonds and stocks over time the monte carlo simulation is one example of a stochastic model it can simulate how a portfolio may perform based on the probability distributions of individual stock returns stochastic investment models can be either single asset or multi asset models and may be used for financial planning to optimize asset liability management alm or asset allocation they are also used for actuarial work a pivotal tool in financial decision makingthe significance of stochastic modeling in finance is extensive and far reaching when choosing investment vehicles it is critical to be able to view a variety of outcomes under multiple factors and conditions in some industries a company s success or demise may even hinge on it in the ever changing world of investing new variables can come into play anytime and could affect a stock picker s decisions enormously hence finance professionals often run stochastic models hundreds or even thousands of times which proffers numerous potential solutions to help target decision making 