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Benchmark is a portfolio of assets or investments used to compare return and risk, typically for an active portfolio. The benchmark is agreed upon in advance by the active portfolio manager and the client. Benchmark portfolio weights are normally set passively, using one of three methodologies: Equal-weighted, Market-Cap-weighted or Price-weighted. The rebalancing frequency is also known in advance. A benchmark is slightly different from the terms Index and Market.
Synonym: bogey
For context, an investor who oversees a portfolio manager must select a fair benchmark that allows for accurate and realistic comparisons of both return and risk. Comparisons can then be made using holdings-based or returns-based analysis. The most detailed analysis comes from knowing the holdings of the benchmark on a daily basis.
Tom: Did they ask any questions about benchmarks
in your IB interview with Oldman Slacks?
Kay: They said not to sweat the details.
Just start every answer with "the client comes first."
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Price. These were phased out in the 1900s.
Yes, but typically only if it was a manager's stated and operational benchmark.
Still unclear on an investing Benchmark? Check out our Excel deep-dive tutorial series with 27 videos called Quant 101. Also, see our risk data on Stocks.
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