What percentage of return volatility is explained by the first component?

Suppose we perform a principle component analysis of the correlation matrix of the returns of 13 yields along the yield curve. The largest eigenvalue of the correlation matrix is 9.8 .

What percentage of return volatility is explained by the first component? (You may use the fact that the sum of the diagonal elements of a square matrix is always equal to the sum of its eigenvalues.)
A . 64%
B . 75%
C . 98%
D . Cannot be determined without estimates of the volatilities of the individual returns

View Answer

Answer: B