Active vs passive investment. The optimal diversification effect

Abstract

The debate of active and passive investment has been out for a while. The classic investment methodology is based on the active investment. But in this thesis, it will be proved that the behaviour in a long‐term investment period, the passive investment will give better results than the active investment. The second part of this thesis will be based on building a portfolio using passive investment instruments called Exchanged Traded Funds (also known as ETFs). These highly diversified instruments will prove wrong to the common belief of using more than 30 instruments to reduce our diversifiable risk at the minimum. Instead of that, only a combination of 4 instruments will be enough to have all the benefits of the diversification.