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absolutely not. If shareholders were risk neutral, they'd be buying bonds, or holding cash. "passive" investment is wholly built upon the concept that "passive"
by Tyrek 6y ago
absolutely not.
If shareholders were risk neutral, they'd be buying bonds, or holding cash. "passive" investment is wholly built upon the concept that "passive" investment outpaces active investment - the very fact that you're in the equity markets suggests you are chasing the 6-8%+ annualized returns (and associated risks) from equity investments. Passive is a replacement for stock picking, and while more conservative in nature, isn't really so in a relative sense.
- eru 6y ago> If shareholders were risk neutral, they'd be buying bonds, or holding cash. Huh? Many people hold both bonds and stocks and other assets, like real estate. Index funds give you broad diversification at low fees. That diversification mostly removes out company-specific idiosyncratic risk, but it still leaves you exposed to market risk, and no one in their right mind claims otherwise. Even a risk averse person (and even more a risk neutral person) can rationally hold on to very risky assets. Risk aversion just means that you require a higher return for a given level of risk. And a risk neutral person doesn't care at all about risk, they only care about expected returns. That's mostly a convenient abstraction like the famous home economicus. I don't understand why a risk neutral person would want to prefer bonds and cash?