What is Principal component analysis (PCA) in FRM Part 1?

A linear transformation that converts correlated variables into orthogonal components ordered by explained variance. PCA can compress yield-curve factors, but the components may be hard to interpret and can shift across regimes.

Principal component analysis (PCA)

FRM Part 1 glossary · Valuation And Risk Models

Definition

A linear transformation that converts correlated variables into orthogonal components ordered by explained variance.

Principal component analysis (PCA) in plain English

PCA can compress yield-curve factors, but the components may be hard to interpret and can shift across regimes.

Also called: PCA

Practice Principal component analysis (PCA)

What percentage of the total variation is captured by the first two principal components?

Related FRM Part 1 terms

Backtesting
Basis
Basis point
Binomial option pricing model
Black-Scholes-Merton model
Coherent risk measure
Component VaR
Convexity
Delta
Duration (modified)

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