Optimization vs Stratified Sampling Differences

[mbjones21]

Just trying to figure out the mian differences between Stratisfied Sampling and Optimization
1) Stratisfied Sampling Costs Less than Optimization
2) Optimization accounts for the correlations between risk factors where Straisfied Sampling does not.
Correct?

 

[IHateMyLIFO]

Does stratified sampling definitely cost less than optimization? Doesn’t say in Schweser.
Also, optimization results in lower tracking error than sampling.

 

[sunseeker]

Stratified sampling assumes no correlations among variables while Optmization does so you need to take into account correlations and COV, that makes optmization more complex to calculate than stratified sampling. In relation to Optimization :
Pros
> should minimize variance of maturities;
Limitations
> Based on historical estimates

 

[Zeeshan Shafi]

IHateMyLIFO wrote:
Does stratified sampling definitely cost less than optimization? Doesn’t say in Schweser.
Also, optimization results in lower tracking error than sampling.

Yes. Less “transaction” cost to be precise. Optimization needs constant rebalancing even when there are no index changes/dividend reinvestment because of the need to match risk sensitivities over time.
Q2 2016 CFA PM mock. The main reason Stratified was preferred over the optimization in the question was investor’s desire to reduce transaction costs.