SVD for Risk Factor Extraction - Quant Trader Interview Question
Difficulty: Medium
Category: Linear Algebra & Machine Learning
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Topics: SVD, factor-modeling, risk-management, linear-algebra, covariance-matrix
Problem Description
You are tasked with identifying the primary risk factors driving the returns of a portfolio of 100 stocks. You have calculated the covariance matrix of their daily returns over the past year. You decide to use Singular Value Decomposition (SVD) to extract these factors. How does SVD accomplish this in the context of factor modeling?
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