Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. It's 100% free, no registration required.

Sign up
Here's how it works:
  1. Anybody can ask a question
  2. Anybody can answer
  3. The best answers are voted up and rise to the top

I would like to generalize Paul Teetor's A Better Hedge Ratio, which uses prcomp() to determine a ratio between two legs. I am hoping to extend this to multiple legs, but am having trouble finding accurate results. Any suggestions?

share|improve this question

In the case of N components:

  1. compute the NxN covariance matrix
  2. compute the N eiggenvectors and take the one that has the signs that you want
  3. the weights of this eiggen vector corresponds to the basket of N components that you wish to create
share|improve this answer

Your Answer


By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.