Under EMH, what is the likely outcome of active management after costs?

• A. It will consistently outperform regardless of costs.
• B. It will only outperform in rare circumstances.
• C. Consistent outperformance is difficult after costs; hence passive strategies are often appropriate.
• D. It will always underperform due to charges.

Answer: (C)

Under the Efficient Market Hypothesis, prices already reflect all available information. That means there isn’t a reliable way to pick assets or time trades to beat the market on a repeatable basis. When you also subtract costs—management fees, trading expenses, and taxes—the net return that an active manager can deliver becomes even smaller. Because those costs erode any potential excess return, consistent outperformance after costs is unlikely over the long run. Only in rare situations, such as temporary mispricings or in markets with significant inefficiencies, might an active manager post net gains, but these are not dependable, long-term outcomes. Therefore, for most investors, pursuing passive strategies that aim to match the market after costs is often the more sensible approach.