What are the reasons that passive funds or the market index are very hard to beat? 1. The value-weighted market portfolio is a value-weighted portfolio, which means the people with larger wealth to invest in the stock market will have a bigger weight in the market portfolio. The people who become rich through investing might on average have better skills in making money through investing. The fact that the market portfolio behave more like such rich people's portfolio implies that it is difficult to beat the market portfolio 2. Even if every one is equally skillful, which means they also have the same wealth and same expected return, then the market portfolio is still H going to deliever the same return as everyone's portfolio return (because market ret is a value-weighted average of everyone's portfolio return). Thus, holding the market portfolio will allow you not to lose to anyone else in terms of investment performance. 3. People in the market can communicate with each other and share their information. This helps market price become more efficient as it reflects all the information people have. It is hard for any particular indiviudal to beat the market portfolio because any individual cannot have all the information the entire market has 4. Even if most people are noise traders and only one person is a smart trader, the trades of those noise traders will be likely to cancel each other on average or in the long term. given they are noise by definition. This means market price is still going to move in the direction according to that smart trader's trading behavior. As a result, such price movement is likely to be smart. 1, 2, 3, and 4 1, 2, and 3 only 1 and 2 only 1 only