PT  - JOURNAL ARTICLE
AU  - Roel Jansen
AU  - Ronald van Dijk
TI  - Optimal Benchmark Tracking with Small Portfolios
AID  - 10.3905/jpm.2002.319830
DP  - 2002 Jan 31
TA  - The Journal of Portfolio Management
PG  - 33--39
VI  - 28
IP  - 2
4099  - https://pm-research.com/content/28/2/33.short
4100  - https://pm-research.com/content/28/2/33.full
AB  - In this article the authors examine the problem of index tracking. Market capitalization–weighted indexes can be tracked by buying all the constituents at their actual weights, but the higher transaction and administration costs involved with this approach largely make this a non–practical solution. Minimizing a portfolio's tracking error with respect to the benchmark with a relatively small number of stocks is the central focus of the authors. They describe current portfolio optimization methods for the problem, and present a new mathematical optimization method that not only gives better results but also may be able to tackle other problems in portfolio optimization. The findings can easily be extended to solve portfolio construction problems that incorporate expected returns, variance of returns, transaction costs, and additional constraints.