The goal of the passive portfolio manager is to minimize

Question

Quizplus · Accepted Answer

The goal of a passive portfolio manager is to minimize tracking error, which is the difference between the returns of the portfolio and its benchmark index. This is because a passive portfolio manager aims to replicate the performance of the benchmark index, and therefore wants the portfolio returns to closely match the index returns. Minimizing tracking error helps to achieve this goal. Choice A (minimizing alpha) would not be a goal for a passive portfolio manager because there is no attempt to outperform the benchmark index. Choice B (minimizing beta) may be a goal for an active portfolio manager, but for a passive portfolio manager, the beta of the portfolio should match the beta of the index being tracked. Choice C (minimizing standard error) is not a relevant goal as standard error is a measure of the precision of statistical estimates, and not related to portfolio management. Choice E (minimizing portfolio risk) is also not a relevant goal for a passive portfolio manager, as risk levels should be matched to the benchmark index being tracked.

The Goal of the Passive Portfolio Manager Is to Minimize