Hi, Jason:

Thanks for your reply.

No offense, but we'll have to agree to disagree on this one. :-)

Let's look at your example. In your example (as I understand it), 91% of invested funds are passively managed. 9% of invested funds are in active management. Is that correct?

If it is, then one might write an equation giving the total return of the market portfolio as a weighted sum of the passive and active segments:

Market Return = ( 0.91 * Passive Return ) + ( 0.09 * Active Return )

Okay so far?

But now, if we can presume that passive investors hold the market portfolio, we realize that the Passive Return must be equal to the Market Return. So our equation becomes:

Market Return - ( 0.91 * Market Return ) = 0.09 * Active Return

or

0.09 * Market Return = 0.09 * Active Return

thus,

Active Return = Market Return

But this is before costs.

After costs of active management, the Active Return must be less than the Market Return.

Hope this helps to explain Dr. Sharpe's math.

John