A: Investibility vs breadth
B: float bands vs judgement-based construction
C: fewer reconstitution effects vs fewer crossing opportunities
I understand what the question is asking, but I have no clue about the definitions of the choices.
Investibility: ease of investing?
breadth: amount of stocks?
judgement-based: trading activities?
Thanks in advanced
These are all the different tradeoffs when building an international B/m.
Breadth Vs. Investability: Breadth refers to the # of securities in the B/m. the larger the breadth the more smaller capitalization stocks are included. in international markets these small cap stocks may be highly illiquid and so not very easily investable for portfolios that may trade frequently. therefore there is a tradeoff between breadth of the B/m and its investability.
Float Bands Vs. Judgment-based construction: float bands refer to clearly defined rules for a securities inclusion in a B/m. judgement refers to less clearly defined rules and more judgement based decisions by the B/m creators to decide whether a security should be included. it is easier to guess which securities will be included in the B/m if there are clearly defined rules (like float bands), this makes it easier to mimic the B/m if that is the portfolio’s strategy. therefore there is a tradoff between transparency of rules for inclusion and judgement based construction
Fewer Reconstitution effects Vs Few Crossing Opportunities: reconstitution effects are effects on the B/m for including/excluding new/old securities. B/m’s that are relatively stable are easier to cross (trade an entire portfolio for another or cash) than those that are reconstituted frequenty (have many changes) This is because more changes to a B/m makes it more difficult to price and also know which securities are in the B/m. Therefore there is a tradeoff between reconstitution effects and crossing opportunities.
Thanks so much, your definition is better than the book!