PortM P4.5: Index-Based Investing
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5 Terms
Total Return (Index-Based) Strategies
List the strategies in ascending order of passiveness
Pure indexing
Enhanced indexing
Pure active
Total Return (Index-Based) Strategies
List the strategies in ascending order of tracking error
Pure indexing
Enhanced indexing
Active management
What can be challenging about full replication? How is it overcome?
rarely practical due to:
Large # of bond issues and their variability
illiquidity
matching risk characteristics is generally used instead
Enhanced indexing allows
modest deviations in risk characteristics, but generally match duration
Controlling Primary Risk Factors
Match modified duration (MD)
% change in value =
Match key rate durations
% change in value =
Match exposures subject to spread change
% change in relative value =
spread =
