FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation
A portfolio manager's performance is compared with a benchmark. Which of the following is a required property of a valid benchmark under standard performance-evaluation guidance?
A valid benchmark must be investable, so a passive alternative holding its constituents could actually have been implemented. It should also be specified in advance, measurable and reflect the manager's style. Choosing it afterward or basing it on the manager's own holdings would bias the evaluation.
- AIt must be investable, meaning the manager could have held its constituents as a passive alternativeCorrect
- BIt must be the highest-returning index in the asset class over the past five years
- CIt must be selected by the manager after the evaluation period ends
- DIt must contain only the securities the manager actually owned at period end
Explanation
A valid benchmark should be unambiguous, investable, measurable, specified in advance and reflective of the manager's investment style. Choosing it after the fact or picking the best performer introduces bias. Restricting it to the manager's holdings makes it circular and useless as an independent yardstick.
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