Passive versus Active Management

Abstract

The debate over passive versus active management has spawned over three decades. It is more than just a debate of whether markets are efficient or not. Market timing, asset allocation, and skill are necessary components of a healthy manager, whether he or she is passive or active. Bodies of research have claimed that the market exhibits gross inefficiencies and how active managers can exploit these inefficiencies. Other bodies of research have claimed that the market is efficient and all returns are proof of the random walk theory. As more and more models are created for market timing and asset allocation, it is important to review each work critically.