Lowest rebalancing cost - S&P index

FrankCFA · May 31, 2015, 10:43am

Which construction method for the S&P index passive strategy has lowest rebalancing cost?

A. Full replication

B. Optimization

C. Stratified sampling

TGIF12 · May 31, 2015, 10:45am

C?

FrankCFA · May 31, 2015, 12:02pm

.

TGIF12 · May 31, 2015, 12:20pm

And the solution is? From what I read in the CFAI text and schweser, Optimization can better match the index (thus lower tracking risk) but needs more rebalancing?

Hard_Dollars · May 31, 2015, 1:05pm

It’s obviously “A”

S&P 500 is made up of Large Cap, highly liquid stocks. Full replication is (usually) buy and forget, barring dividend re-investment; hence, the strategy will exhibit the lowest rebalancing cost

FrankCFA · May 31, 2015, 1:39pm

Correct, A. ^Hard Dollars, well explained.

TGIF12 · May 31, 2015, 2:11pm

For a portfolio of any size? What if I just have 100k to invest, still use full replication? Buying 500 stocks seems a bit much for that size.

FrankCFA · May 31, 2015, 2:35pm

^ You are right. My question should add 100 million USD portfolio:)