Quant Research

Contents

1. Cholesky Decomposition PPT

An overview of correlated MC Simulation

2. Cholesky Decomposition Excel

Example MC simulation workbook

Correlated Monte Carlo Simulation using Cholesky Decomposition

Here we outline the steps necessary to perform Monte Carlo simulation with multiple correlated assets using Cholesky Decomposition. First we illustrate how to perform Monte Carlo simulation on a single asset. Secondly we look at Monte Carlo simulation for multiple assets that are correlated. Thirdly we discuss how to introduce asset correlation and finally we outline how to use Cholesky Decomposition to generate correlated random variables for Monte Carlo simulation including how to compute the correlation lower diagonal matrix.

Keywords: Multi-Dimensional, Monte Carlo, Simulation, Correlation, Brownian Motion, Ito's Lemma, Cholesky Decomposition, Correlated Random Variables