CFA Level I · CFA Level I Exam · Benchmarking Returns
Which of the following is the most appropriate use of a benchmark in evaluating an investment manager?
A benchmark is most appropriately used as a hurdle for comparing a manager's returns with a reference that reflects the mandate's opportunity set. It does not guarantee positive returns or set fees; it is a yardstick for judging performance relative to the strategy.
- ATo provide a hurdle against which the manager's returns are compared given the manager's stated mandateCorrect
- BTo guarantee the manager earns a positive return in falling markets
- CTo set the fee the manager charges regardless of performance
Explanation
A benchmark is a reference portfolio or index representing the opportunity set implied by the mandate, so manager returns can be judged against it. It does not guarantee returns or determine fees.
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