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Which of the following is a rationale for a portfolio manager to use a passive portfolio management strategy?
The manager does not believe in using benchmarks.
The manager wishes to create capital gains in the mutual fund by frequently buying and selling stocks
The manager believes he or she can outperform the market with his or her stock picking skills.
The manager believes that as the markets are fairly priced, it would be futile to look for mis-priced securities.
D is correct because a passive portfolio management strategy is based on the assumption that the markets are efficient and that it is impossible or very difficult to consistently find mis-priced securities that can generate abnormal returns. A passive portfolio manager aims to replicate the performance of a market index or benchmark by holding a diversified portfolio of securities that mirrors the index or benchmark. A passive portfolio manager does not believe in using active strategies such as market timing, security selection, or sector rotation. The manager does not need to use benchmarks (A), as they are essential for measuring and evaluating the performance of a passive portfolio. The manager does not wish to create capital gains in the mutual fund by frequently buying and selling stocks (B), as this would incur higher transaction costs and taxes, and deviate from the index or benchmark. The manager does not believe he or she can outperform the market with his or her stock picking skills ©, as this would imply an active portfolio management strategy. References: Investment Funds in Canada (IFC) | Canadian Securities Institute
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