Final answer:
To adjust a portfolio to track the index from day 2 to day 3, trades must align with changes in the index's composition and performance. Actively managed portfolios that monitor market conditions are likely to outperform those managed randomly due to informed decision-making.
Step-by-step explanation:
The process of adjusting a portfolio to track an index involves making trades to replicate the performance of the index. On day 2, to adjust your portfolio for tracking the index from day 2 to day 3, you would need to analyze the changes in the index's composition and performance on day 2 and then buy or sell assets in your portfolio accordingly. This could include purchasing stocks that have increased in weight within the index or selling stocks that have decreased in weight or are no longer part of the index. The goal is to mimic the index as closely as possible to achieve similar returns.
Comparing different approaches to investment, a portfolio managed by someone who closely monitors their selections, tracking prices, financial news, and company actions is likely to perform better than a portfolio constructed at random without attention to market conditions. The diligent investor can make informed decisions, capitalizing on market opportunities and avoiding potential pitfalls, whereas the random approach lacks direction and is more vulnerable to market volatility and losses.
Therefore, it is expected that by the end of the year, the portfolio of the investor who actively manages their investments and makes adjustments based on market analysis would likely outperform the portfolio of the investor who does not monitor their investments and makes decisions randomly.