Replication Methods for Passive Equity Investing

Consider a pension fund that is currently reallocating its equity portfolio. The fund has a specific investment goal to replicate the performance of the S&P 500 index while minimizing tracking error. Discuss in detail the replication methods that could be employed to achieve this goal. Include both full replication and stratified sampling techniques in your answer. Address the advantages and disadvantages of each method in the context of the pension fund’s objectives, and provide a recommendation based on market conditions.