11-6. Actively managed funds are likely to be tax inefficient because of the high annual portfolio turnover rates today, often 100 percent or more (meaning on average every stock in the portfolio is sold within a year. Because mutual funds must pass on their capital gains and losses to shareholders, who have no control over the distributions other than selling their shares beforehand, these funds can be very tax inefficient. 11-7. No. An index fund can only perform as well as the underlying index on a gross basis, and on a net basis the annual expense ratio must be deducted. Three active strategies for common stocks include: 11-8. stock selection--searching for undervalued or overvalued stocks sector rotation--shifting the sector weights in a portfolio to take advantage of those sectors expected to do relatively better and avoid those expected to do relatively worse market timing--the attempt to earn excess returns by varying the percentage of portfolio assets in equity securities. 11-9. In evaluating common stocks, according to one study, security analysts rely on presentations from top management of companies, annual reports, and Form 10-K reports that the companies must file with the SEC. 11-10. The cross-sectional variation in common stocks is large. In a given year, there is a wide range in performance of stocks. Investors who can confine stock selection to the stocks in the highest quartile in a given year would largely avoid losing years. However, about 25 percent of the time even the best stocks would have lost money. Cross-sectional variation of returns has been increasing steadily over the decades. 11-11. Sector rotation is an active strategy involving shifting sector weights in the portfolio in order to take advantage of those sectors that are expected to do relatively better, and avoid or de-emphasize those sectors that are expected to do relatively worse. Investors using this strategy are betting that particular sectors will repeat their price performance relative to the current phase of the business and credit cycle. The key to effective strategies involving sector rotation is an accurate assessment of current economic conditions. 11-12. The evidence on market timing suggests that there is little evidence of many investors doing this successfully on a consistent basis. The evidence from mutual funds is particularly persuasive in this regard. 19-1. The potential advantages of puts and calls include: (a) the smaller investment required relative to transacting in the common
11-6. Actively managed funds are likely to be tax inefficient because of the high annual portfolio turnover rates today, often 100 percent or more (meaning on average every stock in the portfolio is sold within a year. Because mutual funds must pass on their capital gains and losses to shareholders, who have no control over the distributions other than selling their shares beforehand, these funds can be very tax inefficient. 11-7. No. An index fund can only perform as well as the underlying index on a gross basis, and on a net basis the annual expense ratio must be deducted. 11-8. Three active strategies for common stocks include: stock selection--searching for undervalued or overvalued stocks sector rotation--shifting the sector weights in a portfolio to take advantage of those sectors expected to do relatively better and avoid those expected to do relatively worse market timing--the attempt to earn excess returns by varying the percentage of portfolio assets in equity securities. 11-9. In evaluating common stocks, according to one study, security analysts rely on presentations from top management of companies, annual reports, and Form 10-K reports that the companies must file with the SEC. 11-10. The cross-sectional variation in common stocks is large. In a given year, there is a wide range in performance of stocks. Investors who can confine stock selection to the stocks in the highest quartile in a given year would largely avoid losing years. However, about 25 percent of the time even the best stocks would have lost money. Cross-sectional variation of returns has been increasing steadily over the decades. 11-11. Sector rotation is an active strategy involving shifting sector weights in the portfolio in order to take advantage of those sectors that are expected to do relatively better, and avoid or de-emphasize those sectors that are expected to do relatively worse. Investors using this strategy are betting that particular sectors will repeat their price performance relative to the current phase of the business and credit cycle. The key to effective strategies involving sector rotation is an accurate assessment of current economic conditions. 11-12. The evidence on market timing suggests that there is little evidence of many investors doing this successfully on a consistent basis. The evidence from mutual funds is particularly persuasive in this regard. 19-1. The potential advantages of puts and calls include: (a) the smaller investment required relative to transacting in the common
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