Which of the following arguments supporting passive investment strategies is (are) correct?
I. Active trading strategies may not guarantee higher returns but guarantee higher costs.
II. Passive investors can free-ride on the activity of knowledge investors whose trades force prices to reflect currently available information.
III. Passive investors are guaranteed to earn higher rates of return than active investors over sufficiently long time horizons.
A) I only
B) I and II only
C) II and III only
D) I, II, and III

Question

Quizplus · Accepted Answer

I is correct as active trading strategies, which involve frequent buying and selling, can incur higher costs due to transaction fees and research costs.
II is also correct as passive investors can benefit from the price movements caused by active knowledge investors without incurring the associated costs.
III is not entirely correct as it is impossible to guarantee higher rates of returns for any investment strategy, be it passive or active, over a long time horizon. However, passive investing has historically proven to be a successful strategy for many investors.

Which of the Following Arguments Supporting Passive Investment Strategies Is