Index funds-Construction and performance measurement

Index funds-Construction and performance measurement

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Article ID: iaor1989438
Country: United Kingdom
Volume: 40
Issue: 10
Start Page Number: 871
End Page Number: 879
Publication Date: Oct 1989
Journal: Journal of the Operational Research Society
Authors: ,
Keywords: programming: quadratic
Abstract:

An index fund is an investment vehicle which mimics a stock-market index and thus exhibits market risk only. Fund managers can passively invest in index funds and concentrate on actively managing the remainder of their funds. This paper looks in detail at the use of statistical selection methods in the construction of these funds. The measurement of the ability of these funds to track the underlying index is examined. Emphasis is placed on the relevance of the horizon of the investor to the choice of measure of tracking error. Four different methods of index-fund construction are described and applied to Japanese stock-market data. The tracking abilities of the constructed funds, both in and out of sample, are compared and contrasted.

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