8 Questions
What is the main advantage of physical replication over synthetic replication?
Reduced exposure to counterparty risk
Which tracking method is characterized by a sophisticated computer modelling technique?
Optimization
Why is full replication considered suitable for only large portfolios?
It is more expensive than other tracking methods
What is the primary concern associated with stratified sampling?
Subjectivity in selection leading to biases
Why does synthetic replication pass on the responsibility of tracking to a swap provider?
To reduce the tracking error
Which tracking method employs a representative sample of securities from the index?
Stratified sampling
What is the downside of using optimization as a tracking method?
Complexity and sophistication involved
Why is full replication generally considered more accurate than stratified sampling?
It holds all index constituents based on their weightings
Test your knowledge on index replication methods such as physical and synthetic replication. Learn about full replication, a tracking method that requires each index constituent to be tracked according to its weight. Explore the advantages and disadvantages of different replication techniques.
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