canadiananalyst

hdave5 Wrote:
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> Vol 4 - Reading 33 Equity Portfolio management
> 3 approaches to equity management: Passive
> (Indexing), Active, and Semi-active (Enhanced
> Indexing).
>
> Enhanced Indexing is variant of active investing
> but portfolio manager worries more about tracking
> risk. It frequently offers highest IR.
>
> Within Passive (Indexing) approach 3 methods: Full
> replication, Stratified Sampling, Optimization.
> Full replication has lowest tracking risk but
> highest cost, Optimization has highest tracking
> risk, and Stratified Sampling is in between. It
> works best when Index has >1000 stocks and full
> replication becomes costly.
>
> In the problem above, Hayes is concerned about
> tracking risk and wants to maximize IR which is
> best done by Enhanced Indexing.


Although Optimization should lead to lower tracking risk than stratified sampling since it uses factor models to match factor exposures of the an index. Can someone confirm?