What is the difference between active and passive investment strategies?

Active investment strategies involve ongoing buying and selling of securities with the goal of outperforming the market or a specific benchmark through careful analysis and research. Investors employing active strategies typically attempt to take advantage of market inefficiencies and capitalize on short-term price movements. This often results in a higher turnover rate within the portfolio as managers adjust their holdings based on market conditions or investment opportunities.

On the other hand, passive investment strategies aim to replicate market returns rather than outperform them. This is achieved by investing in a portfolio that mirrors the components of a market index, such as the S&P 500. Passive investors utilize a buy-and-hold approach, minimizing trading activity and associated costs, and relying on the overall growth of the market over time instead of needing to make frequent buy or sell decisions.

In this context, the distinction made in the correct answer highlights the active nature of strategy B—buying and selling—as a characteristic of active strategies, whereas the objective of passive strategies is about replicating market performance.