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The Skinny on Quantitative Finance

Principal Component Analysis

The Skinny on Quantitative Finance

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

As traders, we rely on statistics to extract meaningful information from pricing data and summarize the complex relationships between equities. These relationships become less intuitive as the number of instruments increases, but dimensionality reduction is a great way to represent these complex relationships in a more approachable format. Today we are going to discuss one of the many ways to represent relationships between a large number of equities, principal component analysis.

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