Before taking management and trading costs into account, arbitrage activities in the market ensure that the returns of actively managed funds are
A) signiﬁcantly higher than those of index funds with similar risk.
B) signiﬁcantly lower than those of index funds with similar risk.
C) about the same as those of index funds with similar risk.
D) more volatile than those of index funds with similar risk.

Question

Quizplus · Accepted Answer

Arbitrage activities help ensure that pricing inefficiencies in the market are corrected, which means that, before considering management and trading costs, the returns of actively managed funds and index funds with similar risk profiles should be about the same. This is because arbitrageurs exploit differences in price to make profits, thus bringing prices into alignment across the market.

Before Taking Management and Trading Costs into Account, Arbitrage Activities