distinguish between active investment management and passive investment management

Expert Solution

In active portfolio investment management securities and purchased and managed by fund managers. The performance of this portfolio is compared to that of the bench mark index. Suppose the benchmark index is say small cap index (stocks with less market capitalization), then the small cap stocks (trading in the exchange) are purchased and a portfolio is constructed. The return of the portfolio is compared to the benchmark (small cap) index. If the performance of the actively managed portfolio is better than the benchmark index, it means that the portfolio is performing well and vice versa.

Passive portfolio investment management aims to imitate the holdings of an index. In case of passive investment management investments are made in securities in the same proportions as it is in the benchmark index (which the investment portfolio is imitating). As the portfolio mimics the benchmark index, the performance of the passively managed portfolio is not compared with the benchmark index.

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