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Benchmark Return Definition and Quiz
Every active manager should be held accountable for performance and the selection of an appropriate benchmark is a good place to start.
Define - Define Benchmark Return for portfolio performance measurement.
Context - Use Benchmark Return in a sentence.
Quiz - Test yourself.
Published: July 16, 2016
Updated: February 16, 2021
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 for performance measurement
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
Synonym: index return, market return
- 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. The daily holdings
files provide information about that segment of the market and provides
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 less common. Benchmark Returns are
used in portfolio performance analysis applications also known as
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."
Many terms have 4-5 minute videos showing a derivation and
explanation. If this term had one, it would appear here.
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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%?
Index returns become benchmark returns only when an active
manager uses them to compare performance? |
True or False?
False, passive managers have benchmarks too.
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stock market index
risk adjusted return
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