CFA Level I · CFA Level I Exam · Benchmarking Returns
A pension plan hires a manager to deliver a stable return with low volatility, and states the goal as outperforming a 3% absolute return target each year. Compared with a market-index benchmark, this absolute return benchmark is most likely to:
An absolute return benchmark sets a minimum required return that is not tied to market movements. Unlike an index benchmark, it does not require holding index securities, so the option describing a minimum return objective independent of the market is the correct one.
- Aignore the manager's investment universe entirely and be easy to track with an index fund
- Bfocus on a minimum return objective that is not tied to market movementsCorrect
- Crequire the manager to hold the same securities as a broad index
Explanation
An absolute return benchmark sets a minimum target return independent of market performance, such as 3% a year. It differs from index benchmarks whose returns come from a set of securities. It does not require holding index securities.
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