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Active vs. Passive Management: Does Alpha Exist? 2
managers to select the most profitable stocks that should be included in a portfolio. Passive
management, on the other hand, involves the use of a specific stock index as a guide on which
securities should be included in an investor’s portfolio. Investors that use a passive investment
strategy believe in market efficiency as reflected by the availability of all current and future
information about securities in the market, which is in line with the efficient market hypothesis
theory (Phan & Zhou, 2014, 61). Investors that use an active investment strategy, on the other
hand, believe that the market changes from time to time, and therefore a portfolio should adapt to
these changes if profitability is to be maintained, which is in line with the adaptive market
hypothesis (Hiremath & Kumari, 2014, 1). Both active and passive investment management
strategies are frequently used in the exchange market and there is no clear consensus on the
Research Questions
The key research question is whether there are significant differences in the performance
of portfolios managed using active and passive management strategies, as gauged by portfolio
alpha values. The investment alpha basically compares the rate of return of a given portfolio with
a market index or a selected rate of return. The study will also seek to determine whether the
alpha as a measure of performance is ideal for the comparison of the two management strategies.
The study aims to identify the difference in the performance of a portfolio managed using
the active management strategy and one managed using the passive management strategy. The
analysis of the key factors relating to each portfolio management model and how they may
Hypothesis
The hypothesis to be tested will relate to the difference in financial performance between an
actively managed and a passively managed portfolio. The null and alternative hypotheses have
managed using active and passive management strategies as measured by the portfolio
alpha.
using active and passive management strategies as measured by the portfolio alpha.
The research questions identified for the study are specific in terms of the variables that
will be studied. The study will focus on the two investment management strategies and their
effectiveness as shown by the performance of portfolios managed using each. Variables analyzed
by the research question are also measurable, as the investment alpha will be used in the analysis
of portfolio performance. Due to the availability of secondary data in the research area, the key
goals of the study are achievable. The study objectives are also realistic and can be achieved with
An alternative research question that can be used for the study relates to the method used
to measure the performance of the portfolios managed using each of the two methods. An
investment portfolio can either be analyzed in terms of the financial performance recorded in a
given time period, or in terms of the investment risk associated with the portfolio, which is
Active vs. Passive Management: Does Alpha Exist? 4
measured by the stock beta (Estrada & Vargas, 2015, 78). Alternatively, the key research
question for the study can focus on the investment risk associated with portfolios that are
References
Estrada, J. & Vargas, v., 2015. Black swans, beta, risk, and return. Journal of Applied Finance,
22(2).
Hiremath, G. & Kumari, J., 2014. Stock returns predictability and the adaptive market hypothesis
Phan, K. & Zhou, J., 2014. Market efficiency in emerging stock markets: A case study of the
Vietnamese stock market. IOSR Journal of Business and Management,, 16(4), pp. 61-73.