CFA Level I · CFA Level I Exam · Benchmarking Returns
An analyst evaluates a global small-cap equity fund against a large-cap domestic equity index. The most likely problem with this benchmark choice is that it:
The most likely problem is that the large-cap domestic index does not match the fund's global small-cap universe. Differences in size, region and risk exposures would drive the measured excess return, so it would misrepresent manager skill rather than reflect true relative performance.
- Ais investable but too costly to replicate
- Bis unspecified in advance and cannot be measured
- Cdoes not reflect the fund's investment universe, so relative results will be misleadingCorrect
Explanation
A suitable benchmark should be appropriate to the mandate. A domestic large-cap index differs from global small-cap in size, geography and risk exposures, so excess returns would reflect style and region differences rather than manager skill. The index is transparent and measurable, so the other options are wrong.
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