Index Investing: From Theory to Practice · Dr MAI Huu Minh, TRAN Phan Bao Ngoc & HUYNH Nguyen Quoc BuuChapter 5 of 37 · Module 2: Theory
CHAPTER 5
Market Efficiency and the Arithmetic of Active Management
Why beating the market is hard — and why the average investor cannot
Opening question
“My friend's fund beat the VN-Index by 8% last year. Why should I settle for the index when professionals can clearly do better?”
In this chapter
- What economists mean by an "efficient" market, and the weak, semi-strong and strong forms
- Random walks: why price changes are hard to predict
- Sharpe's arithmetic: before costs the average active dollar earns the market; after costs it must earn less
- What fund scorecards measure, and how survivorship bias flatters the survivors
- Luck, skill and the persistence of performance
- The Grossman–Stiglitz paradox: why markets cannot be perfectly efficient
- Where markets may be less efficient — including Vietnam — and why that does not automatically help the average investor
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This chapter is in the full book
Chapter 1 is free to read online. The full text of chapter 5 — with its tables, figures, worked examples and practice lab — is available in the complete edition of Index Investing: From Theory to Practice (Volume 1, NXW Investment Library).
Read Chapter 1 freeGet the full book — contact@nxw.vnSections of this chapter
5.1 What "efficient" means
5.2 Three forms of efficiency
5.3 Random walks
5.4 The arithmetic of active management
5.5 What fund scorecards measure
5.6 Luck, skill and persistence
5.7 The Grossman–Stiglitz paradox
5.8 Where markets may be less efficient
5.9 What this means for the index investor