How do active investment strategies differ from passive strategies?

Active investment strategies are characterized by the frequent buying and selling of assets in an effort to outperform a specific benchmark or the overall market. This approach requires a portfolio manager or investor to analyze market trends, economic indicators, and financial data to make informed decisions about when to enter or exit positions. The goal of active management is to capitalize on short-term price movements and inefficiencies in the market, which involves a higher level of risk and cost due to transaction fees associated with more trading activity.

In contrast, passive investment strategies aim for long-term investment that tracks a market index rather than attempting to beat it. This typically involves a buy-and-hold approach, where investments are made in a diversified portfolio that mirrors the composition of a benchmark. The focus of passive strategies is on maintaining a steady investment without the need for constant market analysis or trading, which can result in lower transaction costs over time.

The other options present common misconceptions about active and passive strategies. Active strategies do not generally involve a long-term holding period; rather, they favor short-term trades. Passive strategies are not characterized by frequent trading; instead, they seek to minimize trading frequency to reduce costs. Lastly, passive strategies do not focus on timing the market but rather aim to remain invested over the long term