Active and Passive Investing: Understanding Samuelson’s Dictum

Abstract We model how investors allocate between asset managers, managers choose portfolios of multiple securities, fees are set, and security prices determined. Investors indifferent higher-cost informed lower-cost uninformed interpreted as passive their portfolio is linked to the " expected market portfolio." make precise Samuelson's dictum by showing that active reduce micro-inefficiencies more than they do macro-inefficiencies. In fact, all inefficiency arises from systematic factors when number assets large. Further, we show costs investing affect macro- micro-efficiency, fees, managed managers. Our findings help explain rise delegated management resultant changes in financial markets.