which of the following statements are incorrect about why it is so hard to beat passive funds/value weighted diversified investment strategies? according to academic study, 96% stocks only earn a return close to risk free rate, because the majority of these stockes disappeared from the stock market. therefore, the market portfolio consists of the long term winners which represent only 4% of the entire stock universe that has been ever listed in the past 100 years. this extreme skewness implies that a concentrated stock picking strategy has extremely high chance of failure relative to a diversified strategy with value weighting, because the latter has a higher chance to cover the long term winner stocks in the portfolio. through trading, market price effectively reflect the opinions all traders who come from different parts of the economy. as a result, information is aggregated. this information sharing could result in the best solution that is even better than the smartest investor in the world, this is just like students sharing wrong answers to their exams can score even higher than the best performing student in class, if these students (but not the best performing student) are allowed to take the exam the second time. this conclusion holds only if there are sufficient diversification. in other words, people cannot have the same set of information (figuratively, students cannot choose the same wrong choice for a question). if only one person has the truth, and he has a very small amount of capital, everyone else are pure noise traders, then the truth may still be priced in eventually because noise traders will cancel out their noise (akin to diversification) if these noise traders are pure random noise. none of the choices given.
