Question

The mutual fund theorem suggests that the passive strategy of investing in a market index portfolio is efficient, but such a theorem can be dismissed by the existence of

Answer 1

Theorem of mutual fund which suggest that the passive strategy of investing in a market index portfolio is efficient, such theorem can be dismissed by the existence of-

A. Insider trading and fraudulent activities committed by the management of the company.

B. Existence of arbitraging and hedging opportunities.

C. Existence of inefficiency and irrational behaviour on the part of the investor in the overall investment processes.

D. Existence of techniques like active technical analysis and fundamental analysis which can help the investor in making a higher rate of return and which will advocate active investment strategy.

E. Existence of agency cost which will be edepicting a conflict between management interest and shareholders interest so there would not be proper reflection on the part of the company as the books of accounts will be filled with window dressing.