When should I prefer Stratified sampling over optimization? Was a question in sample exam 2 but I do not get the reason why not use optimization. Can anyone help?
If factors used to explain stock returns are uncorrelated. I think.
if you are risk averse and want to aviod frequent rebalancing , then go for stratified. if you want a lower tracking error between the two, go for optimization if u want to avoid correlations or covariances between stocks go for stratified
An advantage of optimization compared with stratified sampling is that optimization takes into account the covariances among the factors used to explain the return on stocks. The stratified sampling approach implicitly assumes the factors are mutually uncorrelated.