370 - 7

Full replication

Sampling

Quadratic Optimisation

All the securities in the index are purchased in proportion to their weights in the index.

(costly, closely tracked)

A representative sample of stocks that comprise the benchmark index.

(not as costly)

• Historical information on price changes and correlations between securities are input to a
• computer program that determines the composition of a portfolio that will minimise return deviations from the benchmark.

(relies on historical data and correlations)

The extent to which return fluctuations in the managed portfolio are not correlated with return fluctuations in the benchmark.

Index mutual fund

Exchange traded fund

• Efficient Market Hypothesis 
• - Buy and hold
• - Indexing

• Fundamental Analysis
• - Top down
• - Bottom up

• Technical Analysis
• - Contrarian
• - Continuation

• Anomalies and Attributes
• - Calendar effects
• - Information effects
• - Security Characteristics
• - Investment style

• Explains the variability in the observed returns
• to a security portfolio in terms of the movements in the returns to a series of benchmark portfolios capturing the essence of a particular security characteristic.

Capital market conditions

Investor's objectives and constraints

Determines the long-term policy asset weights in a portfolio.

Frequently adjusts the asset class mix in the portfolio to take advantage of changing market conditions.

Continual adjustments in the portfolio allocation, assuming that expected market returns and risks are constant over time, while the investor’s objectives and constraints change as his or her wealth position changes.