For which of the following reasons may a mimicking portfolio fail to accurately track an index?

A) beta is not used
B) time periods do not vary
C) it is assumed that the index remains the same
D) all of these choices

Question

For which of the following reasons may a mimicking portfolio fail to accurately track an index?

A) beta is not used
B) time periods do not vary
C) it is assumed that the index remains the same
D) all of these choices

Quizplus · Accepted Answer

There are a number of reasons why a mimicking portfolio can fail to accurately track an index.First,beta is used as the basis for matching the portfolio to the index.Second,beta estimates are prone to error.Third,the mimicking portfolio is formed under the assumption that the characteristics of the asset classes (i.e.expected returns,variances and correlations)remain unchanged over periods.It is also assumed that the index remains the same.

For Which of the Following Reasons May a Mimicking Portfolio