This document compares active and passive portfolio management strategies. Active portfolio management aims to outperform the market through security selection and asset allocation based on analysis of market trends. Passive portfolio management closely tracks market indexes with minimal trading and lower fees. The document outlines advantages such as potential higher returns for active strategies and lower costs for passive strategies, as well as disadvantages like underperformance risk and lack of flexibility.
This document compares active and passive portfolio management strategies. Active portfolio management aims to outperform the market through security selection and asset allocation based on analysis of market trends. Passive portfolio management closely tracks market indexes with minimal trading and lower fees. The document outlines advantages such as potential higher returns for active strategies and lower costs for passive strategies, as well as disadvantages like underperformance risk and lack of flexibility.
This document compares active and passive portfolio management strategies. Active portfolio management aims to outperform the market through security selection and asset allocation based on analysis of market trends. Passive portfolio management closely tracks market indexes with minimal trading and lower fees. The document outlines advantages such as potential higher returns for active strategies and lower costs for passive strategies, as well as disadvantages like underperformance risk and lack of flexibility.
This document compares active and passive portfolio management strategies. Active portfolio management aims to outperform the market through security selection and asset allocation based on analysis of market trends. Passive portfolio management closely tracks market indexes with minimal trading and lower fees. The document outlines advantages such as potential higher returns for active strategies and lower costs for passive strategies, as well as disadvantages like underperformance risk and lack of flexibility.
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Title
Active v/s Passive Portfolios
Management C. Sridharan (23RPCO031) I-M.COM Active Portfolio Management: Active portfolio management refers to the process of actively managing an investment portfolio with the aim of achieving superior returns compared to the market benchmarks or indexes.
It uses various strategies and techniques to select securities and allocate
assets based on market trends and conditions, with the ultimate goal of outperforming the market.
Active portfolio management involves a more hands-on approach to
investing and requires constant monitoring and analysis of market data to make informed investment decisions. Passive Portfolio Management:
Passive portfolio management, also known as passive investing or index
investing, involves creating and maintaining a portfolio that closely mirrors the composition of a specific market index, such as the S&P 500.
Passive management involves minimal trading and aims to capture the
overall market trends rather than attempting to outperform it, as opposed to active portfolio management where managers make frequent investment decisions in an attempt to beat the market.
Passive strategies typically have lower fees and are favored by
investors. Advantages of Active Portfolio Management:
The potential for higher returns if the portfolio
manager's decisions lead to outperformance. Flexibility to adjust the portfolio based on changing market conditions and investment opportunities. Opportunity to capitalize on undervalued or overlooked securities. Disadvantages of Active Portfolio Management:
Higher fees and expenses due to increased trading
and research costs. The risk of underperforming the market or benchmark, especially if the portfolio manager's decisions are suboptimal. Active management success may vary over time and may be subject to the "random walk" hypothesis, suggesting that markets are unpredictable in the short term. Advantages of Passive Portfolio Management:
Lower fees and expenses due to reduced
trading activity and reliance on rules-based strategies. Consistent and predictable performance that closely tracks the chosen index or benchmark. Less dependence on the skill and expertise of a portfolio manager. Disadvantages of Passive Portfolio Management:
Limited potential for outperformance, as the
goal is to match the market's returns rather than beat them. No active decision-making to respond to unique market opportunities or changing conditions. Vulnerability to market downturns, as passive portfolios will experience losses when the underlying index declines.
