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Benchmark Return definition

Every active manager should be held accountable for performance and the selection of an appropriate benchmark is a good place to start.
  1. Define - Define Benchmark Return.
  2. Context - Use Benchmark Return in a sentence.
  3. Quiz - Test your knowledge.
by Paul Alan Davis, CFA, July 16, 2016
Updated: January 6, 2019
Call it a market benchmark, investment index, benchmark index or whatever you like. Its returns are fundamental to any investment performance analysis study.

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Benchmark Return

Beginner

Benchmark Return is the return on the comparison benchmark portfolio of investments for the period of study. It is added to Active Return to determine Total Return. Benchmark Return is slightly different from Market Return and Index Return, although the terms are often used synonymously.

  • Total Return = Benchmark Return + Active Return

To clarify often confusing terms, note the subtle differences below.

  • Market - A Market is often the most general term in that it can be used to generalize about the whole stock or bond market in general.
  • Index - An Index is a more specific term than Market and is clarified with a name, like the S&P 500, Russell 2000, MSCI EAFE, for example. It is most common for service providers to publish holdings and returns on an Index as both information about that segment of the market and as a bogey for portfolio managers.
  • Benchmark - When an Index is used as a bogey for active and passive managers it is considered a Benchmark. A Benchmark need not be a third-party Index, meaning it can be created by the manager or consultant, but that is not common. Benchmark Returns are used in portfolio performance analysis applications also known as portfolio benchmarking.

Synonym: index return, market return


In a Sentence

Pat:  If the market was up 4%, and we were up 3%, why is Eve so happy?
Ted:  Our benchmark return  was 2%, and that's what's in her bonus plan."

Video

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Video Script

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Quiz

Click box for answer.

With a total portfolio return of 10.24%, an active return of -1.75%, what was the benchmark return? | 8.49% or 11.99%?

11.99%

Index returns become benchmark returns only when an active manager uses them to compare performance? | True or False?

False, passive managers have benchmarks too.

Questions or Comments?

Still unclear on Benchmark Return? Try out the course Quant 101.

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  • To see all terms in the Glossary, click Outline.
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