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...