Replication Methods in Passive Equity Investing

Consider a scenario where a portfolio manager is exploring the use of passive equity investing as a strategy for managing a large pension fund. The manager is particularly interested in replication methods to ensure the portfolio accurately tracks the performance of the benchmark index, the S&P 500.

Discuss the various replication methods used in passive equity investing, including full replication and stratified sampling. Evaluate the advantages and disadvantages of each method in terms of transaction costs, tracking error, and the fund manager's ability to efficiently track the benchmark.

Support your discussion with examples of situations in which each method may be preferable.