medium · FRM Part 1 Quantitative Analysis
An analyst is using Principal Component Analysis (PCA) to manage a large portfolio of fixed-income instruments.
What is the main benefit of this approach?
- Eliminating the need to estimate correlations between different yield curve points.
- Increasing the R² of a regression by adding more independent variables.
- Reducing many correlated risk factors into a few orthogonal components.
- Ensuring that the portfolio is perfectly hedged against all interest rate moves.
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