Portfolio Construction Methods: Replication, Sampling, and Optimization

In regards to a blended approach, which of the following passive portfolio construction approaches is best for large-cap equities?

No. Optimization is best suited for lots of securities with higher trading costs.

Correct! Full replication is the best approach for large-cap securities in a blended portfolio construction because large-cap equities are liquid and have lower transaction costs than small-cap stocks.

Incorrect. Stratified sampling is best for an index with lots of securities and high transaction costs.

Optimization

Full replication

Stratified sampling