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Up2
Fatima Al-Mukhtar is an investment manager who invests in the informationally efficient capital market of Libya. Which of the following investment styles should result in the highest net returns if Al-Mukhtar only invests in mid-cap Libyan stocks?
- A. Active management
- B. Passive management
- C. Both methods will result in the same net returns
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Up2
Assuming informationally efficient, active and passive should net the same returns. However passive should be more cost-efficient, so passive should have the highest net returns.
…right?
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Up1
The correct answer is B.
In an informationally efficient capital market, investors should use a passive management style because an active management strategy has high transaction and execution costs which is why actively managed investments should underperform.
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