Project: Portfolio Selection · Benchmark Tracking

Lesson 3

Nikolai Chukhin · Alexander S. Kulikov

We will reuse the following toy market.

Suppose the budget is \(B=18\). The vector \((a_{\text{ALP}},a_{\text{BET}},a_{\text{CYB}},a_{\text{DYN}})=(1,1,0,0)\) spends \(10\) and has tracking error \(|4-5|+|6-5|+|0-8|+|0-10|=20\). The vector \((1,0,1,0)\) spends \(13\) and has tracking error \(|4-5|+|0-5|+|9-8|+|0-10|=17\). Both are feasible, and the second tracks the targets better than the first. We can do better still.

Problem. Consider the share vector \((0,1,0,1)\), which is feasible because it spends \(6+11=17\le 18\). What is its tracking error?

5 points