Explain how Betas of Index funds result below one under a passive strategy.

Question

Quizplus · Accepted Answer

The Answer is There is no such index fund that has a performance that exactly matches the performance of the index it tracks on a month-by-month or year-by-year basis.Cash inflows from investors,the payment of dividends,and the response to changes in the composition of the index cause the cash position to change and transaction costs to be incurred.Index funds available to individual investors also maintain a cash position to smooth out cash flows.This results in Betas to be slightly below one with respect to the index being tracked.It means that the index funds generally do slightly better when markets are down and slightly worse when markets go up.

Explain How Betas of Index Funds Result Below One Under