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Questions and Answers
What is the main advantage of physical replication over synthetic replication?
What is the main advantage of physical replication over synthetic replication?
- Lower tracking error
- Reduced exposure to counterparty risk (correct)
- Increased diversification
- Higher cost efficiency
Which tracking method is characterized by a sophisticated computer modelling technique?
Which tracking method is characterized by a sophisticated computer modelling technique?
- Optimization (correct)
- Full replication
- Stratified sampling
- Synthetic replication
Why is full replication considered suitable for only large portfolios?
Why is full replication considered suitable for only large portfolios?
- It is more expensive than other tracking methods (correct)
- It requires holding all index constituents based on their weightings
- It involves more counterparty risks
- It provides less accurate tracking for smaller portfolios
What is the primary concern associated with stratified sampling?
What is the primary concern associated with stratified sampling?
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Why does synthetic replication pass on the responsibility of tracking to a swap provider?
Why does synthetic replication pass on the responsibility of tracking to a swap provider?
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Which tracking method employs a representative sample of securities from the index?
Which tracking method employs a representative sample of securities from the index?
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What is the downside of using optimization as a tracking method?
What is the downside of using optimization as a tracking method?
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Why is full replication generally considered more accurate than stratified sampling?
Why is full replication generally considered more accurate than stratified sampling?
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