Which statement best describes active investment strategies vs. passive?

Which statement best describes active investment strategies vs. passive?

• A. Passive tracks a market index with lower costs.
• B. Active aims to outperform the benchmark through market timing.
• C. Passive uses security analysis to beat the market.
• D. Active aims to outperform the benchmark through security selection.

Answer: (D)

Active investment strategies try to beat a benchmark by selecting specific securities the manager believes will outperform. This relies on analyzing and choosing individual securities, aiming to achieve higher returns than the index. That makes the description of active aiming to outperform the benchmark through security selection the best fit. In contrast, passive strategies seek to replicate a market index and keep costs low by using broad diversification and little trading. Market timing can be used by some active managers, but it isn’t the defining feature; the core idea is purposeful security selection to try to beat the benchmark rather than simply following an index.

Active investment strategies try to beat a benchmark by selecting specific securities the manager believes will outperform. This relies on analyzing and choosing individual securities, aiming to achieve higher returns than the index. That makes the description of active aiming to outperform the benchmark through security selection the best fit. In contrast, passive strategies seek to replicate a market index and keep costs low by using broad diversification and little trading. Market timing can be used by some active managers, but it isn’t the defining feature; the core idea is purposeful security selection to try to beat the benchmark rather than simply following an index.