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

Answer with Explanation:

If the markets are not efficient then there higher probability that the investor can earn from the price fluctuations because the markets are not valuation is different. The investor would be spending money on gaining the benefit of price fluctuations which will be for short term only and he will be acting in time to continuously earn money from the fluctuation.

The investors and financial institutions will master the quantitative analysis and qualitative analysis of the price changes to guess where will be the change going to happen and we must take advantage of it.

The passive investment is the investment which the management intents to hold for a longer period to benefit from it. If the markets are not efficient then it is useless to hold an passive investment. Rather holding a passive investment it would be better to hold an active investment which benefit more as we will be beating the market by price differences. The possession of passive investment is less expensive as apposed to active investments because less fee is charged by the broker. Active investment would be risky investment because we will continuously gaining and loosing money.

The financial advisers opt to creating a portfolio of active and passive investments to lower the unsystematic risk and increase the gain limit to average return.

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