Reference no: EM133227654

Question 1.

Passive investing through market-cap weighted indices allows investors to capture the equity risk premium at very low cost. There is though considerable evidence that such products are not efficient in the sense they do not maximise risk-adjusted expected returns. In particular market cap weighting can lead to overly concentrated positions in individual stocks. Furthermore, market cap weighting often leads to signi?cant exposure to sources of risk that are not rewarded over the long term, such as the Size and Growth factors. Smart Beta seeks to address the shortcomings of passive investing by implementing rules-based investment strategies that target exposure to factors which academic research has shown generates excess returns over the long term. Examples of such factors would be Value, Quality, Momentum, Small Size and Low Volatility. The use of Smart Beta is now widespread.

What are the likely consequences to markets if the shift from active to passive investing persists into the future?

Question 2.

"ESG," "responsible investing," and "sustainable investing" are broad umbrella terms that refer to the incorporation of environmental, social, and governance (ESG) considerations into investors' portfolio decisions. ESG implementation has not been de?ned consistently, partly because ESG investing is evolving. In the asset management industry, where active management faces competitive pressure from index investing, ESG strategies have been the bright spot in terms of new funds being launched and receiving in?ows.

Discuss the reasons why ESG investing has become mainstream and the challenges in integrating ESG into existing investment portfolios.