Qualified Financial Adviser (QFA) Pensions Exam 2 Practice Test

Programming an investment to mirror a market index is a classic example of passive management. The goal is not to outguess the market but to reproduce the index’s returns as closely as possible. This is usually done by holding the same securities in the same proportions as the index (full replication) or by using a sampling approach when full replication isn’t feasible, all with minimal buying and selling to keep costs low. Because the emphasis is on tracking the index, turnover and fees stay comparatively small, and decisions are rule-based rather than based on discretionary stock picking.

Active management, by contrast, aims to beat the index through selective stock choices and market timing, which is not what an index-tracking fund is about. Terms like dynamic or aggressive aren’t standard descriptors for this purpose; they imply adjusting strategy or seeking higher risk rather than simply mirroring the benchmark.