Financial Education

In order to determine the success of an investment strategy it must be compared to a benchmark. A valid benchmark should possess the following qualities:

• Unambiguous - the identities and weights of securities or factor exposures should be clearly defined
• Investable - could the investment be placed in the benchmark itself rather than being managed actively
• Measurable - the return should be readily available or calculable
• Appropriate - the benchmark should reflect the manager’s style or expertise
• Reflective of current investment opinions - an equity manager has opinions (positive or negative) on equities but may have no opinions on fixed income securities. The latter should not be included in a valid benchmark.
• Specified in advance - all interested parties should know the benchmark and its constituents before an evaluation period begins
• Owned - the manager is willing to accept responsibility for performance relative to the benchmark

For more information, see all articles on: Asset Allocation, Investment Returns, Performance Measurement, Portfolio Management

See also:

Types of Benchmarks

Direct Investments in Real Estate

Quality Tests for Portfolio Benchmarks

Types of Risk in Equity Portfolio Management

A Completeness Fund for Equity Management