Caroline runs a portfolio, which screens out securities with low ESG scores from the benchmark index. She then reweights the portfolio with the remaining securities according to their market capitalisations. To address tracking error, she runs a portfolio optimisation programme. Has the tracking error issue been resolved?
A. No, she should apply a strong ESG tilt to the portfolio.
B. Yes, but the portfolio is now overweight securities that correlate with omitted securities.
C. Yes, the removal of a small portion of securities from the benchmark will not impact relative performance in the long run.
D. Yes, this strategy generally outperforms its benchmark when the excluded securities underperform.