ROLE AND RISK & COST CONCEPT IN ACTIVE AND PASSIVE MANAGEMENT
Name:
Institution:

Role and risk & cost concept in active and passive management
Active and passive management are the two classes in which the investment strategies are categorized. Active management is whereby financial professionals try to outperform a specific benchmark. Passive funds like the exchange traded funds (ETFs) are whereby the index is tracked with no active stock selection (Barr, 2009). The risk of a failing a benchmark or index can be reduced through passive investment. Passive investment also reduces the cost. The active investment has the potential of boosting returns through outperforming some benchmarks. However, there are increased risks and also there are no guarantees that the benchmarks will be exceeded or matched. In a well-diversified portfolio, active and passive investment can flourish.
The role of ETFs which is an important building block for dynamic and diverse portfolios is to offer access to equities and fixed income across large developed economies and the emerging markets. ETFs can be traded like share, thus similar liquidity is offered hence it allows the investor to adjust to their portfolios. In the context of investors’ specific objective, active management allows risks to be managed properly (Barr, 2009).
Passive funds don’t neutralize risks, but they introduce benchmark risks and concentrated risks to investors and in relation to exchange-traded fund. The concept of market efficiency holds that there can be no over-valued or under-valued securities because of the market factors of discount which at all times influence the pricing of securities. The use of passive investment strategies may lead to the establishment of asset allocation which is a disadvantage because it will encourage a static approach.
Active investment has a challenge of being