# Principal Component Analysis

*Math & Statistics — Finicade finance glossary*

PCA rewrites correlated variables as a smaller set of uncorrelated components ordered by how much variance they explain. Its most famous finance application is the yield curve, where three components — level, slope and curvature — explain around 95% of all movement across every maturity. That result is why rates desks hedge three exposures rather than thirty.

**Also known as:** PCA, dimension reduction, principal components

**Related terms:** [Eigenvalue](https://finicade.com/glossary/eigenvalue), [Covariance](https://finicade.com/glossary/covariance), [Multicollinearity](https://finicade.com/glossary/multicollinearity), [Yield Curve](https://finicade.com/glossary/yield-curve), [Matrix](https://finicade.com/glossary/matrix)

Source: https://finicade.com/glossary/principal-component-analysis