Problem bank

Problem 272 of 333MediumStatisticsP272

PCA of equicorrelated assets

  1. You have nn assets with unit variance and the same pairwise correlation ρ\rho between every pair. Find the eigenvalues and eigenvectors of the correlation matrix. What fraction of total variance does the first principal component explain, and what happens as n→∞n \to \infty? For which ρ\rho is the matrix a valid correlation matrix?