Solution: Sparse vs Dense Factor Signal

Exercise: Sparse vs Dense Factor Signal

Solution

L2 is usually a better first baseline because it shares weight across correlated predictors. L1 can choose one representative and drop the rest, which may be unstable.

Takeaways

• State the assumption that makes the method valid before trusting the result.
• Connect the computation back to the finance workflow, not only to the code.
• Check whether the result depends on average-case behaviour, validation design, or numerical safeguards.