FA-2F:

To understand active and passive investing and their differences and their importance in finance today.

Beating the market is the key objective underpinning financial analysis. The analyst hopes to obtain a better insight of the market and to identify some misevaluation he could benefit from. This is what is called active management: using the financial analyst expertise to pick up companies in the hope of obtaining a better return than the market. On the contrary, believing that there is no way to beat the market on a long-term basis leads to passive management: tracking the market to obtain the same risk and return.

What is the value of active investing today? Read the article of Charles D. Ellis (JANUARY 20, 2017), The end of active investing ?, and answer the following questions.

1. How has the value of active investing evolved? Give some figures.
2. What are the reasons identified by the author for this change?
3. Explain the following sentence: But, most of that will be due to focusing on the lucky winners while ignoring the equally unlucky losers in the wide dispersion of results so predictably caused by the statistical law of small numbers.
4. Describe the evolution of passive funds.
5. Discuss the philosophy underlying both active and passive management. What does it mean for Financial Analysis?