$3 million is available to invest in a passive portfolio benchmarked to the Russell 3000. Determine which method is the most appropriate method for constructing the equity portfolio: full replication, stratified sampling or optimization.
Given the existence of ETFs, why isn’t full replication the correct answer?
I used the thumb rule : if number of stocks < 1000…choose full replication,
Another if index contains mainly small cap then it becomes costly.
In the guideline answer, they have mentioned this. However,question specifically says…“The benchmark for the portfolio is the Russell 3000 Index, which is based on market capitalization and consists of 3,000 large U.S. publicly-traded companies”. So IMO, this should not be problem.
Respectfully , ETF s are not the same as full replication . Full replication means you actually invest in stocks of the index , all of them . That can take considerable cost and considerable time
Learned something new about index funds. From the iShares prospectus:
“BFA uses a representative sampling indexing strategy to manage the Fund. “Representative sampling” is an indexing strategy that involves investing in a representative sample of securities that collectively has an investment profile similar to the Underlying Index.”