I am referring to Pg 95- Example 9 Q2
In the Answer given can we say that if we replicate primary Risk Factors of Index, Tracking error will be reduced namely-
- Sector/Quality
- Portfolio Risk Adjusted Effective Duration
- Krds
- Coupon/Sector/Quality in case of Callable Bonds
- Spread Duration
- Weight of each Issuer
As against 3 Risk Factors replicated presently by Fund i.e. Duration, Sector/Quality and Market Weights
Also, my concern is Market Weight does not form part of primary risk factors so it may not be replicated.
Market Weight of issuer is not a primary risk factor used to construct a sample of index constituents (enhanced index) that closely tracks an index.
Sir…
That was what i wanted to ask … If i would have written in the answer that KRD along with other 5 PRF that tracking error can be reduced further.
Instead of Competitor of KRD i,.e. PV Cash Flow Distribution method.
Also, how it provides improved way over KRD.