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Market Risk [36]

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Bullet points include: PCA focuses just on magnitude of contribution to variance. The trace of the covariance matrix (i.e. the sum of the variances of each security in the universe) equals the sum of its eigenvalues. So even the most important PCA components might just be (larger magnitude) random noise. Smaller PCA components may be indistinguishable from noise Or may not contribute at all given data limitations

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