PRMIA 8010 Exam - Topic 1 Question 5 Discussion

Actual exam question for PRMIA's 8010 exam

Question #: 5
Topic #: 1

[All 8010 Questions]

A risk analyst peforming PCA wishes to explain 80% of the variance. The first orthogonal factor has a volatility of 100, and the second 40, and the third 30. Assume there are no other factors. Which of the factors will be included in the final analysis?

AFirst, Second and Third

BFirst and Second

CFirst

DInsufficient information to answer the question

Show Suggested Answer

Suggested Answer: C

The total variance of the system is 100^2 + 40^2 + 30^2 = 12500 (as variance = volatility squared). The first factor alone has a variance of 10,000, or 80%. Therefore only the first factor will be included in the final analysis, and the rest will be ignored.

Interestingly, this example highlights one of the limitations of PCA. Obviously, the second and third factors are material when considering volatility, though the effect of squaring them to get the variance makes them appear less important than they are.

by Filiberto at May 07, 2022, 11:41 AM

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Deeann

4 months ago

First factor alone won't cut it, need at least the second!

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Eleonora

4 months ago

I thought we needed more info to decide?

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Jenise

4 months ago

Wait, what about the third factor? Seems important too.

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Huey

4 months ago

Totally agree, first and second make sense!

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Gussie

4 months ago

Gotta include the first two factors for 80% variance.

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Essie

5 months ago

I practiced a similar question where we had to decide how many components to keep based on explained variance. I think the first two factors should be included.

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Selma

5 months ago

I think we need to add up the volatilities to see if they reach 80%. The first two factors seem like they might do it, but I need to double-check.

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Gertude

5 months ago

I remember that PCA focuses on capturing variance, but I'm not sure how to calculate the cumulative variance here.

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Kaitlyn

5 months ago

I'm a bit confused about how to interpret the volatility numbers. Do we just sum them up, or is there more to it?

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Lamonica

5 months ago

I'm a little confused by the options here. I'll need to review my notes on best practices for writing effective bug reports to determine the right answer.

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Phyliss

5 months ago

Hmm, I'm not too sure about this one. I'll need to think it through carefully.

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