Chartered Financial Analyst (CFA) Level 3 Practice Exam

Enhanced indexing is an investment strategy that seeks to achieve returns that are slightly above those of a benchmark index while maintaining a similar risk profile. The characteristic that describes this approach accurately involves its goal of modestly outperforming the benchmark—typically by a target of 20 to 30 basis points.

The essence of enhanced indexing is that it maintains a core position in the index while utilizing techniques such as slight deviations from index weights, active security selection, or sector tilts. This allows it the potential for marginal excess returns over the benchmark, while still being more passive compared to active management.

The strategies used in enhanced indexing do not eliminate the need for research; rather, they require a degree of analysis to identify specific securities that may outperform or to determine optimal rebalancing strategies. Hence, while the strategy may rely less on extensive fundamental stock analysis compared to traditional active management, it certainly does not disregard market research altogether.

Ultimately, the primary focus of enhanced indexing is to deliver a performance slightly above that of a passive index without deviating significantly from the prescribed risk factors, which is encapsulated in aiming for a slight outperformance, making option B the correct choice.