Question

Inestors can choose between index funds and individual assets in the asset selection problem. What advantages and disadvantages do index funds present to investors? if investors choose to pick stocks instead, what measures can be taken to ensure the investment makes sense based on firm foundation principles? what effect does a higher trading volume have on a portfolio, and why?

Answer 1

Advantages associated with investment into index fund is that an investor can be sure of matching returns of the benchmark index. An investor can be sure about matching the return of the benchmark . it is a highly diversified portfolio and assets are properly allocated.this type of investment are highly safe investment.an investor will never underperform the market.

Disadvantages associated with index fund that are that an investor can never beat at the rate of return of the index and and it is a passive form of investment and it is costly too.

When selection for stocks, an investor should keep in his mind the firm foundation principle which advocates that investors should buy and sell stocks on the basis of overvaluation and undervaluation in accordance with intrinsic value of the firm.

Higher trading volume helps in price price discovery mechanism .It leaves with very less of scope for under valuation or over valuation of shares so shares are adequately valued in the stock market and it has a healthy effect on portfolio.