I investigate the question of how to construct a benchmark replicating portfolio consisting of a subset of the benchmark’s components. I consider two approaches: a sequential stepwise regression and another method based on factor models of security returns´ first and second moments. The first...

I investigate the question of how to construct a portfolio consisting of a few securities that an investor can use to track a benchmark. I consider two approaches: a sequential stepwise regression and another method based on factor models of security returns. The first approach produces the...

We investigate whether adding fundamental indices to a portfolio provides increased diversification benefits. Our results show that equity investors who care only about portfolio mean and variance will benefit from including a fundamental index in their portfolios. This benefit is especially...

We propose a novel approach to the benchmark replication problem which uses a minimum tracking error variance as an objective subject to a target expected outperformance. When no budget constraint is imposed on the replicating portfolio, the solution involves that standard hedge portfolio and...

I investigate the question of how to construct a benchmark replicating portfolio consisting of a subset of the benchmark's components. I consider two approaches: a sequential stepwise regression and another method based on factor models of security returns. The first approach produces the...