Compare the tracking error found in part (a) to the tracking error found for Portfolios A and B in Exhibits 25-1 and 25-2 . What can you say about the investment management strategy pursued by this portfolio manager?
What will be an ideal response?
The tracking error found for our problem is greater especially compared to Portfolio A. A greater tracking error means greater deviation from the benchmark. This is seen if we compare active return values from our table with the greater active return values found in the exhibits. For our problem, it appears the manager may be employing a high-risk strategy to enhance the indexed portfolio's return. This strategy is commonly referred to as enhanced indexing or indexing plus.
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