ACTIVE VS PASSIVE MANAGEMENT

The theory that the stock market reflects all available information, making it impossible to consistently beat the market on a risk-adjusted basis.

EMH states that all past market price information is already reflected in current stock prices, making technical analysis useless.

EMH suggests that all information publicly available, including company reports and financial news, is already incorporated into stock prices, rendering fundamental analysis ineffective.

EMH proposes that even non-public information, such as insider trading tips, is already reflected in stock prices, making any form of analysis futile.

Investing strategies that attempt to profit from patterns in past market prices. EMH suggests this is ineffective as all relevant information is already priced in.

Investing strategies that analyze company-specific data, such as financial statements and industry trends. EMH suggests that this can also be ineffective in achieving consistent excess returns.

A fundamental assumption of the EMH is that investors are rational and unbiased when making investment decisions. This assumption is often questioned, as human behavior can be influenced by emotions and biases.

The EMH implies that active investment management, which seeks to outperform the market by identifying undervalued assets, is unlikely to be successful consistently.

The assumption that all price inefficiencies will be quickly exploited by smart market participants, bringing prices back to equilibrium.

The costs associated with gathering and processing information before making investment decisions.

The expenses incurred when buying or selling securities, such as brokerage fees and taxes.

The risk that market movements are driven by irrational traders, making it difficult to predict and exploit price inefficiencies.

An investment strategy that seeks to match the performance of a specific market index by replicating its composition.

An investment strategy aiming to outperform a specific index by actively choosing securities and adjusting their weights.

An investment strategy that focuses on achieving specific investment goals, regardless of a particular index.

An exchange-traded fund (ETF) is a type of investment fund that tracks the performance of a specific index, sector, or commodity.

An investor who aims to replicate the performance of an index, such as the SPI, through buying and holding its constituents in the same proportion.

Index funds are mutual funds that track a specific market index. They aim to replicate the performance of the index by holding all or a representative sample of its constituent securities.

Passive investment strategies aim to match the performance of a specific market index, without attempting to outperform it. These strategies rely on holding a diversified portfolio of securities that closely track the chosen index.

The underperformance of passive investment strategies occurs when the costs associated with managing the fund (e.g., fees, trading expenses) exceed the returns generated by the underlying index.

Securities lending is a practice used by ETFs to generate additional income. They temporarily lend their holdings to other investors, who use them for short selling or other trading purposes.

A 'full replication' strategy involves holding the exact same stocks as the index with identical weights. This method aims for complete replication of the index's performance.

Sampling is a strategy used for ETFs tracking large indices. It involves selecting a representative sample of stocks from the index, using statistical techniques to ensure the ETF's performance closely matches the index.

Synthetic replication uses derivatives, such as total return swaps, to replicate the index's return. This approach involves swapping the return of the index with the portfolio's return.

Active investing involves attempting to outperform the market by using stock selection, market timing, or other strategies. Active managers believe they can generate higher returns than passive strategies.

Active investment strategies often face challenges in consistently outperforming the market, as market efficiency suggests it's difficult to predict stock movements accurately.

The Information Ratio (IR) measures a portfolio's risk-adjusted performance. It compares the portfolio's excess return (alpha) to its tracking error (volatility relative to its benchmark). A higher IR indicates better risk-adjusted returns. Investors seek to maximize the IR of their portfolios.

Information Coefficient (IC) measures the accuracy of your predictions about asset performance. It's the correlation between your predictions and the actual outcomes. A higher IC suggests more accurate predictions.

Breadth refers to the number of independent 'bets' or forecasts an investment strategy makes. More independent forecasts (bets) generally lead to higher risk-adjusted returns, similar to diversification.

The Fundamental Law of Active Management states that the maximum achievable Information Ratio (IR) is the product of the Information Coefficient (IC) and Breadth (number of independent forecasts). This means the higher the accuracy of your predictions (IC) and the more independent forecasts you make (Breadth), the greater your risk-adjusted return potential.

Transfer Coefficient (TC) represents the efficiency of implementing your investment strategy. A higher TC indicates a more effective execution of your plans. For example, a long/short portfolio has a higher potential TC than just a long-only one.

An investment approach that aims to outperform market benchmarks by carefully selecting specific securities based on analysis and insights.

A traditional active investment strategy that seeks to beat a specific market index (e.g., S&P 500) by identifying undervalued stocks and crafting a portfolio with different weights.

An active investment style focused on achieving specific goals (e.g., positive returns, high dividends) without targeting a particular index, but rather building a portfolio with desired characteristics within a selected universe of stocks.

A type of active investment that seeks to outperform the market by using leverage, short-selling, and frequent trading to exploit market opportunities and bet on specific events.

A category of active investment that focuses on specific events like mergers, leveraging market fluctuations to generate returns.

An active investment approach that aims to profit from both rising and falling prices by taking long and short positions in stocks.

An active investment strategy where the portfolio has zero net exposure to the market, with trades focused purely on exploiting relative price differences between securities.

A type of hedge fund strategy that aims to minimize market risk while generating returns by hedging long equity positions with various techniques, including short-selling.

A strategy that involves creating a portfolio of securities based on specific factors like value, momentum, or size, instead of relying solely on individual stock selection.

A key advantage of active investing, offering the potential to outperform the overall market by identifying undervalued assets and generating higher returns.