
 Principal Components Analysis 




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Principal Components Analysis
A relatively simple and mechanical procedure for obtaining statistical measures of factors to use in a multifactor model of security returns. Available in many statistical software packages, it operates by constructing one factor that explains the greatest part of historical return variability. It then defines a second factor, unrelated to the first that explains the next greatest amount of return variability. The third and successive factors are defined similarly.

Glossary *
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