What characterizes the core portfolio in the core-satellite approach?

• A. It consists of only high-cost investments
• B. It typically includes low-cost passive investments
• C. It is focused exclusively on international markets
• D. It avoids all forms of market tracking

Answer: (B)

In the core-satellite approach to portfolio management, the core portfolio is characterized by typically including low-cost passive investments. This segment acts as the foundation of the portfolio, providing broad market exposure and stability, usually through index funds or exchange-traded funds (ETFs) that track major markets or asset classes. The rationale behind this selection is to achieve efficient market exposure at a lower cost, signifying a strategy that prioritizes keeping expenses down while maintaining a diversified investment base.

The core portfolio serves as a stable anchor against which more actively managed or specialized investments (the satellites) can be added to enhance returns or provide additional exposure to alternative investments. This contrasting strategy allows investors to potentially outperform the market through the satellite investments while relying on the core for consistent, reliable performance.

The other options do not align with the characteristics of a core portfolio. For instance, focusing only on international markets or avoiding all forms of market tracking would deviate from the intended balance and foundational nature of the core within the broader investment strategy. Moreover, incorporating high-cost investments goes against the core's defining characteristic of maintaining low costs to maximize net returns over time.