In theory, as a greater share of capital is invested passively rather than actively managed, stock prices will be freer to diverge from fair value, resulting in marginally less efficient equity markets. The effect should be an amplification of managerial skill, which manifests itself in the tails of α distributions. I find evidence that mutual fund α distributions differ increasingly as a function of the share of assets invested in passive vehicles. However, I find no evidence that the “tailedness” of the distributions increases as a function of the share of assets invested passively. This may be a result of the limited sample size, or it may be that higher levels of passive share are required for this effect to materialize.

The increasing popularity of passive investment strategies causes the long-term feasibility of active investing to be questioned more often. Therefore, this research aimed to uncover whether active investors' influence on fund performance is positive and significant enough to offset the cost involved, thereby providing reasoning for active rather than passive investing. A comparative analysis of 211 actively managed funds and 191 market and industry-specific indices is performed. Security selection skills and market timing ability are captured through a model comprising of the Fama French three-factor and the Treynor and Mazuy market timing model. The sample is tested between 2005 and 2020, with 5-year sub-periods. Over the full period, active and passive returns are found to be nearly indistinguishable. However, active funds seem to excel during bearish periods, where passive funds excel in bullish periods. The standard deviation is higher overall for passive investing. This difference, however, disappears during bearish periods. The security selection skill is barely distinguishable from zero for either strategy. On the other hand, market timing ability is existent for active investors, indicating a positive effect in bearish markets and a negative effect in bullish markets. Additionally, for both investing strategies, more than 90% of the returns are explained by the movements of the general market. The most suitable investment strategy is truly determined by an investor's level of risk aversion. Nevertheless, this research found that, in general, the passive investing strategy is dominant under normal market conditions. Active investors can act on the macroeconomic developments that fuel crises. This advantage enables them to achieve returns superior to indices while preserving a lower standard deviation during bearish market conditions.

A growing number of studies have been conducted in the sphere of portfolio analysis concerning different approaches for analyzing stocks and outperforming the market. Pioneers in the sphere of portfolio theory like William Sharpe and Harry Markowitz have developed strategies and ratios for portfolio analysis that could generate positive risk-adjusted returns. Thus, this paper will solicit a number of these strategies to endeavor and generate a return that is higher than the market index while considering the expenses that come with buying and selling stocks (transaction costs). Therefore, the purpose of this study is to assess how active investing measures up to passive investing in the sphere of the Swedish stock market. The roadmap to achieve the desired goals set by the authors is to create numerous portfolios on a weekly basis with securities present in the Swedish OMX30 index using the Maximum Sharpe, Maximum M2, Minimum Variance, and Equally Weighted optimizations. Then the significance of the transaction costs will be tested and a comparison with the market index will be made. The results suggest that in the realm of the Swedish stock market, investing in dynamically optimized portfolios based on the maximization of Sharpe Ratio and M2 will generate higher returns in comparison to passively investing in the market index, and the significance of transaction costs varies upon the amount of capital invested in the portfolios.