Modern Portfolio Theory explores how risk-averse investors construct portfolios to optimize expected returns against market risk and quantifies the benefits of diversification. Two opposing investment management styles, active management and passive management, claim superiority in terms of long-term, risk-adjusted performance. Tests of the efficient market hypothesis, asserting that markets properly price securities, underlie the ongoing active versus passive debate.; The primary research question is: During the 1995--2002 economic cycle, which management style, active or passive, produced the best risk-adjusted investment performance? A study of the 1995--2002 timeframe is significant, because it covers the 1995--1999 five-year market expansion and the three years of the 2002 market contraction. The study tested five hypotheses derived from the literature review. For example, during the 1995--1999 timeframe, passive investments would be expected to outperform active investments on a risk-adjusted basis. Likewise, during the 2000--2002 period, when the markets experienced three consecutive down years, actively managed funds would be expected to outperform passive investments on a risk-adjusted basis. The Sharpe composite portfolio performance measure, that combines risk and return into a single value, was used to measure, analyze, and rank risk-adjusted performance.
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