medium · Quantitative Finance
Which property of a covariance matrix Σ is utilized when using Principal Component Analysis (PCA) to decompose portfolio risk?
- The determinant of Σ is always equal to 1.
- Σ has a trace of zero, meaning total risk can be eliminated.
- The matrix Σ is upper triangular.
- Σ is a symmetric matrix, allowing for an orthogonal basis of eigenvectors.
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