CFA Level I · CFA Level I Exam · Benchmarking Returns
An index of 400 stocks is constructed from a list including only companies that are still listed at the end of the test period. A back-test of a strategy against this index will most likely produce results that are:
Results will most likely be biased upward because of survivorship bias. Excluding companies that were delisted or failed removes weak performers from the historical data, so the index's measured returns look better than what investors actually experienced.
- Abiased upward because of survivorshipCorrect
- Bbiased downward because of look-ahead
- Cunbiased because delisted firms are small
Explanation
Including only firms that survived omits failed or delisted companies, which typically performed poorly. This removes poor returns from the data and inflates measured historical returns, a survivorship bias. Look-ahead bias is a different problem involving information not available at the time.
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