Optimization vs. Stratified Sampling. matching, account, against, factors, growth

Muddahudda

Guys,

Is this the right understanding:

(a) Statified sampling/Cell matching

1. Starting with index components, match market caps with sector (FI) or market caps with value/growth (EQ) in a 2-axis grid
2. Pick certain representative securities
3. Buy these on the premice that you've replicated factor exposure at a lower cost than pure passive indexing

(b) Optimization:

1. Match index components in a multi-dimensional grid, against a range of factors, in a way that takes into account the covariance between assets.
2. Pick certain representative securities
3. Buy these on the premice that you've achieved a more advanced mimicing of factor exposure at a lower cost than pure passive indexing

Is Optimization, (b) the same as a 'factor model' for alligning risk exposures along the lines of PVD CF, Sector contrib to Duration, Issuer exposure, Secotr/Quality %...etc?

Thanks

APP

IAmNeil

Stratified sampling: with fixed income, you're characterizing the portfolio by risk factor - because you want to match the same risk factor exposures as the index. "Risk factors" mean changes to duration, convexity, yield curve twists, spread changes etc. Steps 2 & 3 sound right. The advantage is you've mimicked the index's return and risk profile without having to buy all the bonds.

thommo77

which is cheaper?