What is the difference between the two? Enhanced indexing approach? Indexing approach with stratified sampling?
as per my undertsanding, Stratified Sampling is one of the way to implement Ehanced indexing
The original question is 2010 PM Question 19: The Hayes Endowment is willing to accept a certain degree of tracking risk provided it is compensated with incremental returns. In particular, Hayes wishes to implement an investment approach that maximises the information ratio. 19. In order to meet the objectives of Hayes University Endowment , the most appropriate investment approach is an: A. enhanced index approach. B. active market oriented approach. C. index approach using stratified sampling. Answer: A ========== What is wrong with C?
Vol 4 - Reading 33 Equity Portfolio management 3 approaches to equity management: Passive (Indexing), Active, and Semi-active (Enhanced Indexing). Enhanced Indexing is variant of active investing but portfolio manager worries more about tracking risk. It frequently offers highest IR. Within Passive (Indexing) approach 3 methods: Full replication, Stratified Sampling, Optimization. Full replication has lowest tracking risk but highest cost, Optimization has highest tracking risk, and Stratified Sampling is in between. It works best when Index has >1000 stocks and full replication becomes costly. In the problem above, Hayes is concerned about tracking risk and wants to maximize IR which is best done by Enhanced Indexing.
Enhanced indexing maximises the information ratio.
Stratified sampling is a method to replicate an index i.e passive managment. Enhanced indexing is not passive
S- Sampling is a method to smartly replicate an index. Enhanced indexing is an active form of indexing wherein an investor slightly tilts the various parameters of the portfolio w-r-t the benchmark. However, it is ensured that the duration of the portfolio remain equated with the duration of the benchmark index. so S sampling is just a way to effeciently replicate a benchmark index. whereas E indexing is a strategy of exploiting miniature ineffeciency together with matching the durations of portfolio and benchmark index.
sampling is not even a relevant option that answer the question.
ITS NOT SAMPLING WHAT I HAVE MENTIONED ITS S SAMPLING. STRATIFIED SAMPLING KKKK ??? oAL???
FINE OAL29??? ITSS S. SAMPLING FROM WHCIH I MEANT STratified sampling only my dearest friend… i never mentioned sampling i said s sampling from which i meant stratified sampling only fine dear oal29???
lol - feeling a little high strung vikas? Hang in there. 3 days.
hdave5 Wrote: ------------------------------------------------------- > Vol 4 - Reading 33 Equity Portfolio management > 3 approaches to equity management: Passive > (Indexing), Active, and Semi-active (Enhanced > Indexing). > > Enhanced Indexing is variant of active investing > but portfolio manager worries more about tracking > risk. It frequently offers highest IR. > > Within Passive (Indexing) approach 3 methods: Full > replication, Stratified Sampling, Optimization. > Full replication has lowest tracking risk but > highest cost, Optimization has highest tracking > risk, and Stratified Sampling is in between. It > works best when Index has >1000 stocks and full > replication becomes costly. > > In the problem above, Hayes is concerned about > tracking risk and wants to maximize IR which is > best done by Enhanced Indexing. hdave, ‘Optimization has highest tracking risk, and Stratified Sampling is in between’ I remember i saw on notes somewhere optimization has less tracking error than s sampling?
Enhanced Index highest IR. Right from the book.
hdave5 Wrote: ------------------------------------------------------- > Vol 4 - Reading 33 Equity Portfolio management > 3 approaches to equity management: Passive > (Indexing), Active, and Semi-active (Enhanced > Indexing). > > Enhanced Indexing is variant of active investing > but portfolio manager worries more about tracking > risk. It frequently offers highest IR. > > Within Passive (Indexing) approach 3 methods: Full > replication, Stratified Sampling, Optimization. > Full replication has lowest tracking risk but > highest cost, Optimization has highest tracking > risk, and Stratified Sampling is in between. It > works best when Index has >1000 stocks and full > replication becomes costly. > > In the problem above, Hayes is concerned about > tracking risk and wants to maximize IR which is > best done by Enhanced Indexing. Although Optimization should lead to lower tracking risk than stratified sampling since it uses factor models to match factor exposures of the an index. Can someone confirm?
It does but it has to be rebalanced because the factor sensitivities change over time.
daveydog Wrote: ------------------------------------------------------- > hdave5 Wrote: > -------------------------------------------------- > ----- > > Vol 4 - Reading 33 Equity Portfolio management > > 3 approaches to equity management: Passive > > (Indexing), Active, and Semi-active (Enhanced > > Indexing). > > > > Enhanced Indexing is variant of active > investing > > but portfolio manager worries more about > tracking > > risk. It frequently offers highest IR. > > > > Within Passive (Indexing) approach 3 methods: > Full > > replication, Stratified Sampling, Optimization. > > Full replication has lowest tracking risk but > > highest cost, Optimization has highest tracking > > risk, and Stratified Sampling is in between. It > > works best when Index has >1000 stocks and full > > replication becomes costly. > > > > In the problem above, Hayes is concerned about > > tracking risk and wants to maximize IR which is > > best done by Enhanced Indexing. > > > Although Optimization should lead to lower > tracking risk than stratified sampling since it > uses factor models to match factor exposures of > the an index. Can someone confirm? Yes, notes saying: regardless of its limitations, an optimization approach leads to lower tracking risk than a stratified sampling approach. this is particularly true when optimization is combined with replication. In this case, a few of the largest securities are purchased and the rest of the securities in the index are mimicked using an optimization approach
vikas5871 Wrote: ------------------------------------------------------- > FINE OAL29??? ITSS S. SAMPLING FROM WHCIH I MEANT > STratified sampling only my dearest friend… i > never mentioned sampling i said s sampling from > which i meant stratified sampling only > > > fine dear oal29??? here have another red bull buddy …your energy seems to be waning