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Active versus Passive Portfolio Management
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Active versus Passive Portfolio Management
Active versus Passive Portfolio Management
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1
Question
How does active management attempt to outperform the market?
Page 2
Answer
Active management aims to outperform the market through security selection and market timing.
2
Question
What is the primary goal of passive portfolio management?
Page 2
Answer
Passive management seeks to match market returns by tracking an index with minimal trading.
3
Question
How does the Efficient Market Hypothesis (EMH) define asset prices?
Page 2
Answer
The Efficient Market Hypothesis (EMH) suggests that asset prices reflect all available information.
4
Question
What is the definition and investor implication of the Weak Form of market efficiency?
Page 2
Answer
Weak Form efficiency means prices reflect past trading data, implying that technical analysis is ineffective.
5
Question
What characterizes the Semi-Strong Form of market efficiency and its impact on analysis?
Page 2
Answer
Prices incorporate all public information, meaning fundamental analysis may not provide an edge.
6
Question
What does the Strong Form of market efficiency claim regarding investor performance?
Page 2
Answer
Prices include all public and private information, and no one can consistently outperform.
7
Question
What is the primary objective of an active portfolio manager?
Page 3
Answer
The objective is to select individual securities and adjust allocations to exploit mispricing.
8
Question
What are the three main advantages of active portfolio management?
Page 3
Answer
The advantages include potential for outperformance, risk management, and flexibility.
9
Question
What are the three main disadvantages of active portfolio management?
Page 3
Answer
The disadvantages are higher costs, inconsistent performance, and tax inefficiency.
10
Question
How is passive portfolio management implemented in practice?
Page 4
Answer
Passive management involves tracking a benchmark index using index funds and ETFs.
11
Question
What are the three primary advantages of passive portfolio management?
Page 4
Answer
The advantages are low costs, tax efficiency, and transparency.
12
Question
What are the two major disadvantages of passive portfolio management?
Page 4
Answer
The disadvantages are no outperformance potential and market risk exposure.
13
Question
In the one-year cost comparison, which strategy had the higher net return despite a lower pre-fee return?
Page 4
Answer
Passive management had a higher net return of \(8.50\%\) compared to the active management net return of \(8.25\%\).
14
Question
Explain the long-term cost impact comparison for a \(\$100,000\) investment over \(20\) years.
Page 5
Answer
The passive portfolio outperforms by \(\$19,326.98\) despite a lower return because of lower fees.
15
Question
How do active and passive management differ in their goals and fees?
Page 5
Answer
Active management aims to beat the market with high fees, while passive management aims to match market returns with low fees.
16
Question
Under what three conditions should an investor choose active investing?
Page 6
Answer
Active investing is used for emerging markets, economic shifts, and thematic investing.
17
Question
When is passive investing the most appropriate strategy for an investor?
Page 6
Answer
Passive investing is best for broad market exposure, long-term investing, and tax-efficient portfolios.
18
Question
What is the hybrid approach in portfolio management?
Page 6
Answer
The hybrid approach combines a core passive portfolio of index funds with a satellite active portfolio for niche sectors.
19
Question
Detail the asset allocation for the example hybrid portfolio mentioned in the material.
Page 7
Answer
The allocation is \(50\%\) U.S. Equities (Passive), \(20\%\) International Equities (Passive), \(15\%\) Emerging Markets (Active), and \(15\%\) Alternative Investments (Active).
20
Question
What final conclusion does the material provide regarding active vs passive management choice?
Page 7
Answer
Long-term investors should go passive, market-timers and niche investors should go active, and a hybrid strategy is the best approach for many.
21
Question
Why is the potential for outperformance possible for active managers?
Page 3
Answer
It is possible if market inefficiencies exist that can be exploited by skilled managers.
22
Question
Explain the difference in flexibility between active and passive management.
Page 5
Answer
Active management has high flexibility to react to economic conditions, while passive management has low flexibility because it must track an index.
23
Question
How does risk management differ between active and passive strategies according to the criteria table?
Page 5
Answer
Active management can hedge risks, whereas passive management is fully exposed to market risk.
24
Question
What is the typical expense ratio for passive funds compared to active ones?
Page 3
Answer
Passive funds often have expense ratios less than \(0.2\%\), while active funds range from \(1\%\) to \(2\%\).
25
Question
Why is active management often associated with inconsistent performance over time?
Page 3
Answer
Many active funds underperform their benchmarks over time because of high costs and the difficulty of market timing.
26
Question
Define the satellite portion of a Core-Satellite portfolio strategy.
Page 6
Answer
The satellite portion consists of actively managed funds used in niche sectors to seek outperformance.
27
Question
How do the fees of active and passive management impact the net returns for investors?
Page 4
Answer
Higher fees in active management reduce the net return, often making it lower than the net return of passive funds.
28
Question
What constitutes a thematic investment as mentioned in the active investing section?
Page 6
Answer
Thematic investing involves focusing on specific trends or sectors such as AI or clean energy funds.
29
Question
Explain why emerging markets are often cited as suitable for active management.
Page 6
Answer
Emerging markets are often less efficient, providing more potential for alpha through expert management.
30
Question
What is the purpose of the core portion of a hybrid portfolio strategy?
Page 6
Answer
The core portion provides low-cost broad market exposure through passive index funds.