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
|Annualized active risk||5.5%||6.0%||3.2%|
|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:
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.