CFA Level I · CFA Level I Exam · Benchmarking Returns
A firm sets its benchmark after seeing which index produced the lowest return during the year, then reports the manager's outperformance. This practice is best described as a failure of which benchmark quality?
This is best described as a failure to specify the benchmark in advance. Picking the index after performance is known lets the firm choose a flattering comparison, so the benchmark is no longer an objective, ex ante standard for judging the manager.
- AUnambiguous
- BReflective of current investment opinions
- CSpecified in advanceCorrect
Explanation
Choosing the benchmark after the results are known allows selection of a flattering comparison. A benchmark must be specified in advance so that it is a fair, ex ante standard. Ambiguity concerns unclear constituents, and current opinions concerns the manager's knowledge of the securities.
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