hard · FRM Part 1 Quantitative Analysis
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.
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