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b.) The goal of the passive manager should be to minimize the portfolio's return volatility relative to the index, i.e., to minimize tracking error. Suppose
b.) The goal of the passive manager should be to minimize the portfolio's return volatility relative to the index, i.e., to minimize tracking error. Suppose an investor has formed a portfolio designed to track a particular benchmark. Over the last eight quarters, the returns to this portfolio and index returns are as given; Managers (in %) 4.6 3.6 7.0 3.5 6.4 8.5 7.6 10.1 Index (in %) 4.2 4.6 5.7 4.7 5.7 9.5 7.0 11.2 Periods 4 Required Determine the tracking error (6 Marks) Determine the annualized tracking error (2 Marks) ii. c.) i. Differentiate between index funds and the exchange traded funds (3 Marks) ii. Give an advantage of using either of the two (2 Marks) d.) Give two reasons why you would advise an investor to rebalancing their portfolio (2 Marks)
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