"Active investment management may at times generate additional returns of about .1%. However, the standard deviation of the typical well-diversified portfolio is about 20%, so it is very difficult to statistically identify any increase in performance." Even if true, this statement is an example of the ________ problem in deciding how efficient the markets are.
A) magnitude
B) selection bias
C) lucky event
D) allocation

Question

Quizplus · Accepted Answer

The statement highlights the magnitude problem, which refers to the difficulty in determining whether active investment management truly adds value, especially when the potential additional returns are very small (.1%) compared to the standard deviation (20%) of a well-diversified portfolio. This makes it hard to statistically confirm any performance increase, illustrating the challenge in assessing market efficiency through the lens of active management's effectiveness.

"Active Investment Management May at Times Generate Additional Returns of About