"Its objective is to construct a portfolio of bonds that will equal the performance of a specified bond index. Performance is measured in terms of total return realized over the investment horizon Advantages of Indexing Strategy: 1. Poor and inconsistent performance of active bond portfolio mangers 2. Lower transaction cost 3. Degree of control exercised by the investor Factors affecting the Selection of the Index: Investor’s Risk tolerance, Investment Objectives and Constraints imposed by the regulator. Indexing Methodologies: Methods of Construction: Stratified sampling or Cellular Approach,Optimization Approach, Variance Minimization Approach Utmost care must be taken to minimize the tracking error caused by : Transaction costs in construction of the index, Differences in the composition of the indexed portfolio and the index itself, Discrepancies between prices used by the organization constructing the index and the transaction prices paid by the index manager. Source: http://in.docsity.com/en-docs/Bond_Portfolio_Management_Strategies_-_Security_Analysis_and_Portfolio_Management_-_Solved_Quiz_"
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