Actively managed funds find it difficult to consistently earn higher risk-adjusted returns than a broad stock market index. The difference in return between actively managed funds and passively managed index funds can be explained by which of the following?
I. Lower expense ratios at index funds
II. Higher turnover ratios at index funds
III. Differences in returns in sectors of the market and the overall market return

Question

Quizplus · Accepted Answer

Lower expense ratios at index funds explain the difference in returns because actively managed funds typically charge higher fees for their management. Differences in returns in sectors of the market and the overall market return also explain the difference in returns because passive index funds are designed to track the overall market, while actively managed funds may have different sector weights or investment strategies that can lead to underperformance. Higher turnover ratios at index funds are not a factor that contributes to the difference in returns.

Actively Managed Funds Find It Difficult to Consistently Earn Higher