What is the goal of index optimization?

The goal of index optimization is to identify and select securities that match risk factors. This process involves creating a portfolio that closely resembles a benchmark index while aiming to enhance certain characteristics, such as risk-return profiles. By focusing on matching specific risk factors, optimization attempts to achieve a more efficient replication of the benchmark while potentially lowering costs and improving performance attributes.

In essence, this strategy attempts to balance the trade-offs between tracking error and the desired exposure to various risk factors, ensuring that the optimized portfolio reflects the characteristics of the index it aims to mimic. This involves careful selection of securities to maintain the desired risk profile of the index while optimizing for performance metrics relevant to the investment strategy or objectives.