Equity PM Lisette Langham Case: risk-efficient delivery of results

Another of Langham’s clients, Marianne Quint, sits on the investment committee of the Amity Island Endowment. The $2 billion equity portion of the Amity fund is invested using a global equity index approach. Quint has been charged with identifying an active equity fund to replace 20% of the indexed portfolio. Three candidate funds with similar performance histories, benchmarks, and fees have been identified. Based on the characteristics shown in Exhibit 3, Quint asks Langham to recommend the fund that has demonstrated the best risk-efficient delivery of results.

Characteristics of Candidates for Amity Equity Portfolio

Fund Name Blue Ash March
Sharpe ratio 1.11 0.90 0.92
Annualized active risk 5.5% 6.0% 3.2%
Active Share 0.41 0.48 0.75
Number of securities 340 290 140
Annualized portfolio volatility 11.5% 14.7% 14.9%
Covariance with Amity Fund Low High Low

The fund in Exhibit 3 that is most consistent with Quint’s requirements is:

A. Ash.
B. Blue.
C. March.

C is correct. The March Fund is the fund that is most consistent with Quint’s requirements for the best risk-efficient delivery of results. It delivers the lowest active risk (3.2%) using far fewer securities (140), indicating an efficient approach. The higher Active Share (0.75) for the similar level of fees also supports this decision.

I don’t understand this. Why couldn’t we use the highest Sharpe ratio as a fund which has the best “risk-efficient” delivery of results? Its has best risk-adjusted returns.


Greetings friend! The key words to focus on here are “risk efficient.”

In other words, they want you to identify which of the 3 funds has the lowest active risk with fewer securities… or has a higher active share for the same/similar fees.

For the purposes of the CFA exam - the sharpe ratio is NOT a sign of “risk efficiency” here. In this problem above, you will see that the March Fund satisfies both elements of “risk efficiency” … just memorize this for the exam and you should avoid any pitfalls.

Cheers - good luck - you got this :+1:

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Thanks again…

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Hey! So I also had confusion with this question. My confusion was with the question saying they needed to find an “Active equity fund” to replace 20% of the indexed portfolio. Since they’re talking about active fund, relative measures wouldn’t be as helpful as absolute measures, like the sharpe ratio. I understand some things just have to be memorized for the exam but just want to understand if there’s a flaw in my interpretation.