Question

Assume that markets

are not efficient and that you will

earn the average return of an active

investor if you pick stocks. How should you

choose between active and passive investments

and why

?

Hint: Remember the William Sharpe article.

Answer 1

1. Active investing involves beating the average returns in the market and gaining over the price fluctuations which are short term. This involves the activities of a portfolio managers.

2. It involves considering qualitative and quantitative factors which will form part of an analysis and later picking up when and where the price will change.

3. Passive investing is money management for a long term where limiting of buying or selling takes places.

4. It is cost effective management as it takes place within the bounds of their portfolios.

5. Choosing between both of the two is a debate but Passive investing consist of low fee whereas the other option is expensive. Passive investing has lower risk compared to the Active investment. Many advisers feel that investing in both the choices simultaneously is the best option which obviously reduces the overall risk and diversify the portfolio.