CFA Level I · CFA Level I Exam · Benchmarking Returns
A manager who invests in listed emerging market equities is evaluated against a custom benchmark built from the manager's own past holdings, reweighted after each period to match the portfolio. Which weakness is most likely?
The main weakness is that the benchmark is not independent of the manager. Reweighting it to match the portfolio after each period builds the manager's decisions into it, so excess returns can hide true value added. It remains measurable, so the other claims are incorrect.
- AThe benchmark is probably too transparent to be measured
- BThe benchmark cannot be used to compare any returns
- CThe benchmark may not be independent, so it can mask the manager's true value addedCorrect
Explanation
A benchmark that is reweighted to mirror the portfolio is no longer specified in advance or independent of the manager, so active decisions are built into it and excess return understates or hides skill or its absence. Such a benchmark can still be measured and compared, so the other options are wrong.
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