- Systematic bias - a beta of 1.0 reflect highest quality 2) Tracking error - should reflect small tracking error betw return of port and benchmark as compared betw return of port and a market index 3) Risk characteristics - the systematic risk should average that of the benchmark over time 4) Coverage - the higher the coverage ratio* the better (i.e. the manager is replicating the benchmark). *Coverage ratio = Markert value of the portfolio that are both in the porfolio and the benchmark divided by the total market value of the portfolio. Question - on point 4 - what is the possible range of value for the coverage ratio. The higher the better refers to a range of 0 - 1. Can it be greater than 1? If the manager exactly replicate all the stocks in the benchmark, wouldnt the ratio be 1 (so is that the max)? Thanks
It cannot be higher than 1. You cannot have more than 100% of the stocks in both the port and the bench. Impossible