Practice question
An investor is reviewing two mutual funds: one actively managed and another passively managed (index fund). The actively managed fund has delivered higher returns in the past three years but has a higher expense ratio. What is the most logical approach to decide between the two?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Invest equally in both funds to balance risk and return without analysing their performance
- 2Compare the risk-adjusted returns and consistency of both funds over different market conditions✓
- 3Choose the passively managed fund because it is always more cost-effective in the long run
- 4Invest in the actively managed fund since past performance indicates continued success
Correct answer
Compare the risk-adjusted returns and consistency of both funds over different market conditions
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