Question

How would different portfolio management affect the efficient market hypothesis。

Answer 1

Efficient market hypothesis advocates that all the privately available information and publicly available information have already been discounted into the stock price and there is no scope for making any additional rate of return through active Portfolio Management and one should only try to manage the portfolio by passive Portfolio Management and replicating the index rate of return because the index rate of return can never be beaten in efficient markets.

Management of active portfolio will lead to violation of Efficient market hypothesis because management of active portfolio will be focused at beating the index rate of return which can never be possible in Efficient market and it is a clear contradiction of Efficient market hypothesis.

Passive portfolio management is in line with the Efficient market hypothesis and it will be replicating the index rate of return and it will never beat the index rate of return and it will never underperform the index rate of return so passive portfolio management is encouraged in Efficient market hypothesis and it is in line with the philosophy of Efficient market hypothesis.