What are benefits of index funds and passive investing?

• A. Broad diversification, low costs, and performance that tracks an index
• B. High turnover and active risk
• C. Regional concentration risk and unpredictable returns
• D. Require frequent trading to capture tax losses

Answer: (A)

The main idea here is the typical advantages investors gain from index funds and passive investing: broad diversification, low costs, and returns that closely mirror the index.

Broad diversification means the fund holds a wide basket of securities, often all the securities in a given index. This spreads risk across many companies and sectors, so the impact of any one stock’s poor performance is smaller. That minimizes company-specific risk compared with owning a handful of individual stocks.

Low costs come from the passive approach: there's less need for expensive research, fewer trades, and no active manager making bets on which stocks will outperform. This keeps expense ratios and fees down, which helps net returns over time.

Performance that tracks an index means the fund is designed to mirror the index’s overall return, after fees. You don’t rely on a fund manager’s stock-picking skills; instead, you get movements in the broad market or sector that the index represents, usually with more predictable, stable exposure over the long run.

The other statements point to risks or practices that aren’t benefits of index funds: high turnover and active risk describe active management, not passive investing; regional concentration risk and unpredictable returns describe a scenario more associated with concentrated or poorly diversified portfolios; and requiring frequent trading to capture tax losses is not a feature of traditional index funds and would add costs rather than provide a benefit.