What does sampling in portfolio management refer to?

Sampling in portfolio management refers to the practice of selecting a representative subset of securities from a larger index, rather than attempting to hold every security in that index. This technique is often used to construct portfolios that closely match the risk factor exposures of the broader market or specific benchmarks, without the need for the costs and complexities associated with holding a full replication of the index. By doing this, investors can achieve similar performance characteristics while potentially enhancing efficiency and cost-effectiveness in their investments.

Using a sample allows for practical constraints such as transaction costs, management fees, and liquidity considerations to be addressed while maintaining a portfolio that reflects the desired risk and return profile. The chosen sample aims to accurately represent the overall market or a specific strategy, enabling the investor to manage risks in a controlled manner while taking advantage of the benefits of diversification.