Index Tracking In Portfolio Optimization With Tracking Error Variance Model

Volume 1, Issue 2, December 2016     |     PP. 16-24      |     PDF (182 K)    |     Pub. Date: December 21, 2016
DOI:    393 Downloads     7707 Views  

Author(s)

Lam Weng Siew, Department of Physical and Mathematical Science, Faculty of Science, Universiti Tunku Abdul Rahman, Kampar, Perak, Malaysia; Centre for Mathematical Sciences, Centre for Business and Management, Universiti Tunku Abdul Rahman, Kampar, Perak, Malaysia
Lam Weng Hoe, Department of Physical and Mathematical Science, Faculty of Science, Universiti Tunku Abdul Rahman, Kampar, Perak, Malaysia; Centre for Mathematical Sciences, Centre for Business and Management, Universiti Tunku Abdul Rahman, Kampar, Perak, Malaysia

Abstract
Index tracking is a form of portfolio management in stock market investment. Index tracking aims to track the performance of the stock market index without purchasing all the stocks that make up the market index in order to achieve rate of return similar to the market return. This objective can be achieved by determining an optimal portfolio which minimizes the tracking error of the optimal portfolio to the benchmark market index. Tracking error is a risk measure of how closely a portfolio follows the benchmark index. The objective of this study is to determine the optimal portfolio composition by using tracking error variance (TEV) model in index tracking. The results of this study show that the optimal portfolio of TEV model is able to track the Malaysia market index which is FTSE Bursa Malaysia Kuala Lumpur Composite Index effectively with only holding 40% of the component stocks in the market index.

Keywords
Index Tracking, Tracking Error Variance Model, Mean Return, Portfolio Composition

Cite this paper
Lam Weng Siew, Lam Weng Hoe, Index Tracking In Portfolio Optimization With Tracking Error Variance Model , SCIREA Journal of Economics. Volume 1, Issue 2, December 2016 | PP. 16-24.

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