What's cheaper to implement?

Optimization vs stratified and why? Thx!


You’re buying and selling fewer securities.

what he said

interesting. i always thought that optimization is more costly to implement, due to the periodic rebalancing needed.

According to the old 2016 PM CFA mock Stratified is more cost effective not optimization. I thought it was optimization, but I was wrong. I wanted to get a reasoning behind the answer.

The only advantage optimization has is that it has lower tracking risk than stratified sampling. This is because its a mathematical framework where the objective function is defined such that the individual securities in the portfolio match the risk exposures of the index and the weighting should be such that the tracking risk is minimized.

As far as costs are concerned, even in the absence of index changes, optimization requires periodic trading to keep the risk characteristics of the portfolio aligned with that of the index (which was its stated objective in the beginning).

AWESOME! Thanks!

Sure no problem :slight_smile:

I’m humbled.

Please ignore me in the future.


(Good job, Viraj!)

We can never ignore you magician! This is the first time I believe it happened with you. Thanks for letting us know that you are also a human! (I always presumed anyone can commit mistake in this forum except you!) We have learned endless concepts from you in the past and will continue to do so in future as well:)

You’re very kind.

And you know your stuff. I’m looking forward to your post in August telling us that you passed your Level III exam.