Portfolio Optimization
 What
are good strategies to track an equity index?We look at cap-weighting as a benchmark and derive an new optimization method which takes rebalancing costs into account. Take the S&P Europe 350 as an example. A 75 stock basket with cap-weighting provides the following results (picture on the left). In contrast, an optimized basket looks as follows (picture on the right).
As theses sheets document, small basket optimization not only reduces tracking error, but also improves sector matching and reduces trading costs. For more details, please refer to the studies: | ||||||||||||||||||
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