Which of the following statements accurately describes the role of Principal Component Analysis (PCA) in the context of factor models for financial engineering?
Question 2
In the context of risk factor construction, what is the primary objective when developing a new factor?
Question 3
A financial analyst is performing returns attribution for a portfolio. If the portfolio's outperformance is attributed to a 'momentum' factor, what does this imply?
Question 4
Consider a multi-factor model where the expected return of an asset is given by $E(R_i) = R_f + \beta_{i1}F_1 + \beta_{i2}F_2 + \dots + \beta_{ik}F_k$. If the risk-free rate ($R_f$) is $2.5\%$ , the factor exposure to Factor 1 ($\beta_{i1}$) is $0.7$ , the return of Factor 1 ($F_1$) is $6\%$ , the factor exposure to Factor 2 ($\beta_{i2}$) is $1.1$ , and the return of Factor 2 ($F_2$) is $4\%$ , what is the expected return of the asset?
Question 5
Which of the following best describes a limitation of using a single-factor model compared to a multi-factor model?
