Question

I have been assigned a 3 page research paper into "active investment strategy" versus "passive investment strategy".

Our course's textbook has no direct mention of either after searching exhaustively, which means the research paper invites me to use other sources and any perspectives or angles to defining, giving examples of, and comparing the two strategies.

How would you define them? What topics would they encompass? I imagine passive strategies include ones with fewer steps and less oversight/watch needed, whereas active strategies involve any marketable securities like stocks where you might have to be making all sorts of security analysis and stock market watching. This is for a Fundamentals of Financial Management MBA course that basically goes over every kind of marketable security and every kind of asset.

Do you recommend any sources or databases or academic searches to make this concise 3 page paper?

Thank you for your time and help!

Answer 1

I will try to give a more concise picture of active vs passive investing, also suggest you some materials where you can refer (since this is about a research paper of 3 pages or above, would not be possible under the scope of posting this answer)

1

Subject	Active Investing	Passive Investing
Defining	Making an in-depth analysis of each investment	Matching the market portfolio
Objective	To beat the market returns	To match the market returns (index portfolio) and focus on relative performance
Perspective of Market	Perceive market to be inefficient	Perceive the market to be efficient
Frequency of transaction	Comparatively high with frequent buy and sell	Lower, only rebalancing the portfolio when the index composition changes
Risk vs Return	Higher Risk but with higher return potential	Lower risk and return
Operating Costs	Higher Costs	Lower costs with higher tax efficiency
Term	Takes advantage of short term price fluctuation	Ignores short term fluctuations to focus in the long term
Expertise Required	Requires a higher level of expertise, need to identify price discrepancies, arbitrage opportunities, fundamental and technical analysis of stocks.	Less involvement and decision making, less research and analysis movement
Portfolio Composition	Concentrated Portfolio with fewer securities than the broad market index	All securities of the broad market index to match market performance
Flexibility	More flexibility due to frequent buy and sell	Only when market index changes

I have highlighted 10 major areas of differences, to make a research report kindly read on each and highlight, giving examples of index vs active investments for example

Some Places to research:

1. Investopedia articles
2. CFA curriculum material/blogs (on the portfolio management for Level 1)
3. Book 1: Pioneering Portfolio Management by David Swensen
4. Books 2: Behavioral Portfolio Management by Thomas Howard