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Easy · risk_management · Quant Researcher interview question · absorption_ratio, systemic_risk, pca, eigenvalue_decomposition, risk_monitoring
The absorption ratio, introduced by Kritzman et al. (2011), measures the fraction of total variance in a set of assets explained by the top principal components. A high absorption ratio signals tightly coupled markets where systemic risk is elevated, while a low value indicates more dispersed, idiosyncratic risk, making it a key indicator for market fragility in quantitative finance. Task Implement the function absorption_ratio(returns, num_components) to compute the absorption ratio. This rati