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High transaction costs very high transaction costs

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High transaction costs : very high transaction costs may discourage trading activity by international investors and lead to inefficiencies that may be exploited successfully by active investors. Good financial disclosure and detailed accounting standards : good financial disclosure and detailed accounting standards may provide the well-trained analyst an opportunity to perform fundamental research analysis in order to identify inefficiently priced securities. Capital restrictions : restrictions on capital flows may discourage foreign investor participation and serve to segment the Otunian market, thus creating exploitable market inefficiencies for the active investor. Developing economy and securities market : developing economies and markets are often characterized by inefficiently priced securities and by rapid economic change and growth. The active investor may exploit these characteristics. Settlement problems : long delays in settling trades by non-residents may serve to discourage international investors, leading to inefficiently priced securities which may be exploited by active management. The following arguments could be made in favor of indexing: Economic diversity : economic diversity across a broad sector of industries implies that indexing may provide a diverse representative portfolio that is not subject to the risks associated with concentrated sectors. 25-5
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High transaction costs : indexing would be favored by the implied lower levels of trading activity and costs. Settlement problems : indexing would be favored by the implied lower levels of trading activity and settlement requirements. Financial disclosure and accounting standards : wide public availability of reliable financial information presumably leads to greater market efficiency, reducing the value of both fundamental analysis and active management, and favoring indexing. Restrictions of capital flows : indexing would be favored by the implied lower levels of trading activity and thus smaller opportunity for regulatory interference. b. A recommendation for active management would focus on short-term inefficiencies in, and long term prospects for, the developing Otunian markets and economy, inefficiencies and prospects which would not generally be found in more developed markets. A recommendation for indexing would focus on the factors of economic diversity, high transaction costs, settlement delays, capital flow restrictions, and lower management fees. 25-6
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