Portfolio management approaches can be divided in three categories [2] namely active management, passive management,or a mixed strategy of the two.
Active management relies on the belief that skillful investors are able to outperform
the aggregate market return.
An active manager can try to compose dedicated portfolios that outperform other collections of stocks or may try to exploit arbitrage opportunities like market timing where the moments of buy and sell decisions are optimized.
These opportunities are supposed to exist based on the belief that financial markets
are not fully efficient.
Passive management on the other hand is adopted by investors who believe that financial markets are efficient.
They believe that it is impossible to consistently beat the market.
Their main activity is endeavoring to achieve the same returns and risk of a certain benchmark like a well-diversified portfolio like a stock index.