Does Active Investment Outperform Passive Investment? Evidence From the U.S. Stock Market

Xin Mei

doi:10.54097/3gh7xe84

Authors

Xin Mei

DOI:

https://doi.org/10.54097/3gh7xe84

Keywords:

Active investment; mean-variance methods; passive investment.

Abstract

The U.S. stock market, whose performance reflects the overall economic health of the nation, is significantly influenced by trade policies and geopolitical factors, prompting investors to optimize their portfolio further. This paper selected 5 representative stocks in different industries from January 1, 2015, to December 31, 2024. By establishing the maximum Sharpe ratio, the investment portfolio is constructed. This paper aims to identify the investment portfolio with the highest Sharpe ratio and compare it against to see if the return exceeds 1/N portfolio method and passive investment (S&P 500 ETF index). A comparative analysis of these three methods demonstrates that the Maximum Sharpe ratio approach, yielding a 3.53% monthly return, outperforms both the 1/N portfolio method (0.83% monthly return) and a passive investment in the S&P 500 ETF (0.59% monthly return). This result remains significant after the robustness check, which offers new insight for investors, indicating that active investment methods can achieve better performance during certain periods in the U.S stock market.

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