Why do actively managed investment portfolios struggle to outperform index funds ?
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Answer: D. actively managed funds trade more often and charge fees for their alleged expertise
Explanation
Actively managed funds incur high transaction costs and steep management fees that erode their net investment returns. Frequent buying and selling of securities generates brokerage commissions and capital gains taxes that weigh down performance. High fees charged for alleged portfolio manager expertise rarely translate into consistent outperformance against passive benchmarks. Efficient market hypothesis suggests that asset prices fully reflect all available information, making consistent outperformance difficult. Index funds seek to replicate broad market performance by holding a fixed basket of stocks with minimal portfolio turnover. Management fees for active funds often range from one to two percent annually, compounding wealth losses over time.
Stating that stock markets are inefficient contradicts the core reason why active managers struggle to find mispriced assets. Not all answers are correct because active management fees and trading costs actively hinder overall portfolio performance. Index funds generally buy broad market baskets rather than actively hunting for undervalued stocks through expert research.
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