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Benchmark

Definition

A benchmark is used to compare the performance of an investment to the overall market in order to gauge the results. There are properties that a benchmark must have to be truly valid. Many financial advisors and institutional investors do not follow these guidelines; however, adherence to these guidelines makes a benchmark comparison proper and meaningful. Here are the guidelines (remember that a proper benchmark is a SAMURAI):
Specified in advance - you must know the benchmark and its constituents before the performance measurement period begins
Appropriate - the benchmark should reflect the manager’s style or expertise
Measurable - the return should be readily available or calculable
Unambiguous - the identities and weights of securities or factor exposures should be clearly defined
Reflective of current investment opinions - the benchmark should be aligned with the opinions and beliefs of the manager
Acceptable - the manager should accept responsibility for their performance relative to the benchmark
Investable - This is the most important of all. It must be possible to actually invest in the benchmark. If the benchmark contains uninvestable and unavailable investments, then it is not a valid benchmark.

Using the term Benchmark :

A common benchmark for large cap stock funds is the S&P 500. A common benchmark for bonds is the Barclays Aggregate.

Pay Special Attention To :

Ensure that any benchmark you utilize is investable. If the benchmark you are using is not available for investment (in other words, it is not a valid alternative for investment) then it is not considered a valid benchmark.

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Related terms

Multiple , Tactical Asset Allocation , Trading Styles

'Benchmark' appears in the definitions of these other terms:

Absolute Return Objective Absolute Return Vehicles Active Management Active Return Algorithmic Trading Allocation / Selection Interaction Return Derivatives Quality Control Charts Yield Beta