Some scholars contend that professional managers are incapable of outperforming the market. Others come to an opposite conclusion. Compare and contrast the assumptions about the stock market that support ( a ) passive portfolio management and ( b ) active portfolio management.
The assumptions such as informational efficiency and primacy of diversification motives side with passive management while assumptions in support of active management is that there exists pockets of market inefficiency.
Usually tracking the performance of portfolio by an investor is known as active management.
Assumptions supporting passive management are:
a. informational efficiency
b. primacy of diversification motives
Assumptions supporting active management are:
a. existing pockets of market inefficiency
a. Suppose you forecast that the standard deviation of the market return will be 20% in the coming year. If the measure of risk aversion in Equation 5.13is A 5 4, what would be a reasonable guess for the expected market risk premium? b. What value of A is consistent with a risk premium of 9%? c. What will happen to the risk premium if investors become more risk tolerant? (LO 5-4)
Suppose two factors are identified for the U.S. economy: the growth rate of industrial production, IP, and the inflation rate, IR. IP is expected to be 4% and IR 6%. A stock with a beta of 1 on IP and .4 on IR currently is expected to provide a rate of return of 14%. If industrial production actually grows by 5%, while the inflation rate turns out to be 7%, what is your best guess for the rate of return on the stock?
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