SS11: R27: p282: q20: full replication and trading cost

CFA Level III Equities
#1

is full replication the one minimize the trading cost too?

Are all the indexing strategy has some kind of trading cost? thanks.

#2

wow

Full replication has the highest trading costs … since you need to buy each security in the proportion it occurs on the index.

#3

^ but if you are are tracking a market value wieghted index and you have a large portfolio full replication could be the one to minimize trading costs, because you can buy eveything and then forget about it since it will automaticly adjust…

but if your portfolio is small it will be relativly costly to buy all of them so you sample the index …

#4

just read the text , cpk is right. active management can cost more , but not due to the reasons you suggested . Passive indexing is the most expensive:

  1. Dividend re-investment

  2. Taxes

  3. Index re-constitution inolving possibly many changes.Frictionlless for the index , costly for the passive indexer .

  4. Administration costs of managing more stocks