Question

Musashi and Rina are building their portfolios. Musashi purchases shares in a mutual fund and pays fees to a manager who actively manages the mutual fund's portfolio. He does so because he believes that the manager can identify inexpensive stocks that will rise in value. Rina is not convinced. She buys shares in an index fund—a type of mutual fund that simply buys all of the stocks in a given stock index rather than actively managing a portfolio.

Rina builds her portfolio based on the notion that:
A) All stocks are overvalued.
B) The stock market exhibits informational efficiency.
C) Stock analysts can use fundamental analysis to identify undervalued stocks.

Answer 1

B) The stock market exhibits informational efficiency.

Step-by-step explanation:

There are 2 identifiable ways to manage a portfolio. Active management is explained by Musashi way of investing in which she thinks there may be opportunities that can be exploited by a portfolio manager and she is willing to pay a fee in order to benefit from those opportunities. On the other hand, Rina thinks that markets are efficient and there is no incentive to pay extra, this is called Passive investing. Passive investing usually tracks an index and it is rebalance periodically according to previously known rules.