CFA Level I · CFA Level I Exam · Basics of Portfolio Planning and Construction
Compared with a passive portfolio construction approach, an active approach is most likely to result in:
An active approach most likely results in higher management fees and trading costs. Active managers pay for research and trade more often while deviating from the benchmark, which also raises tracking error. Holding all constituents at benchmark weights is a passive, full-replication feature.
- Alower expected tracking error relative to the benchmark
- Bhigher expected management fees and trading costsCorrect
- Ca portfolio holding every constituent in benchmark weights
Explanation
Active management involves research and more frequent trading, so fees and transaction costs are typically higher. Tracking error is usually higher, not lower, because holdings deviate from the benchmark, and holding every constituent at benchmark weights describes full replication, a passive technique.
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