Index funds

Which of the following is NOT a rationale for investing in index funds? A) Minimize transactions costs. B) Minimize risk. C) Efficient financial markets. D) Active mutual fund managers underperform index funds.


B) Minimize risk.

Answer: B The minimization of risk is not a rationale for investing in index funds.

hmmm…why not? Isn’t an index fund comparable to a highly diversified portfolio with lower unsystematic risk?

they have tracking error risk and subject to the same risk as other equities…its only benefit is diversification

I’m pretty sympathetic to newsuper’s answer. How many different kinds of risk do you minimize by investing in index funds? Crazy manager risk, poor portfolio management risk, etc…