medium · FRM Part 1
A risk analyst is reviewing a correlation matrix for a three-asset portfolio. The eigenvalues of the matrix are calculated as 2.1, 1.2, and -0.3.
What is the primary implication of these results for the portfolio risk model?
- The portfolio has a high degree of diversification benefit due to negative values.
- The matrix is valid, provided the sum of eigenvalues equals the number of assets.
- The assets are highly correlated, as the first eigenvalue is greater than 1.
- The matrix is internally inconsistent and may produce negative portfolio variances.
Sign up free to see the explanation and track your rank →
More FRM Part 1 practice
- According to the CAPM, which type of risk are investors compensated for bearing?
- What specific variety of liquidity risk is being described?
- How is 'Risk Capacity' distinguished from 'Risk Appetite' in a standard risk governance fr
- If a loan has a Probability of Default (PD) of 2.0%, an Exposure at Default (EAD) of $1,00
- If two portfolios have the same Sharpe ratio but one has positive skewness and the other h
- In a 'Liquidity Spiral', what is the primary channel by which market liquidity risk and fu
- In the context of the CAPM, what is the definition of 'Alpha' (α)?
- In the risk decomposition formula σ^2_i = β^2_i σ^2_M + σ^2_ε, what does σ^2_ε represent?