Question

Actively managed funds find it difficult to consistently earn higher risk-adjusted returns than a broad stock market index. The difference in return between actively managed funds and passively managed index funds can be explained by which of the following?

I. Lower expense ratios at index funds.
II. Higher turnover rates at index funds.
III. Differences in returns in sectors of the market and the overall market return.

Answer 1

I and III.

Step-by-step explanation:

An actively managed investment fund is a fund where a management team makes investments decisions on the funds money. The benefits here have greater flexibility.

A passively managed fund, follows the market index. It's investments decisions are not made by a manager. They are automatically selected to match market index. Passive funds have lower expense ratios.

Sometimes active funds do better than passive funds and sometimes passive funds do better than active funds.

Lower expense ratios at index funds and Differences in returns in sectors of the market and the overall market return explains the difference between these two.