The Role Of Active And Passive Portfolio Strategies And Their Link With The Theory Of Efficient Capital Markets

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Discuss the general features, differences, advantages and disadvantages of active and passive portfolio strategies and their link with the theory of efficient capital markets.
Introduction and Definitions:
Depending on whether believing in the Efficiency Market Hypothesis, portfolio strategies are classified as either active strategies or passive portfolio strategies. Active portfolio strategy doesn’t believe Efficiency Market Hypothesis, it uses available information and forecasting techniques to seek better performance than the average market, the aim of this strategy is also known as ‘beat the market’. Whereas passive portfolio strategy treats the market as efficient and believes it is not possible to beat the market returns
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Passive portfolio strategy believes in market efficiency, which means information that affects the markets is available to all investors. Therefore those who go with this theory accept that there is not possible to consistently beat the market averages. Passive portfolio strategy, which is called index investing, can only take advantage of the efficient market by using index funds, directly invest in an index. Usually hold each stock in the proportion it represents of the index, or mathematically from a portfolio of not more than a specified number of stock, which best tracks the index historically. Rather than the index fund, returns of passive portfolio strategy can be optimized through diversification and asset allocation, and by minimisation of investment costs and taxes.

Difference:
Iintuitionally, some difference can be concluded from the features of active and passive portfolio strategies. The objectives of the two strategies are different. Active portfolio strategy might best be described as an attempt to apply human intelligence to find "good deals" in the financial markets. (Steven, 2014) The strategy wants to make a profit, achieve outperforming an investment benchmark index. While believing the market efficiency, the passive portfolio strategy is aimed to obtain a similar market investment performance.
The processes for making reruns of the two strategies are different. Active portfolio

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