What are a benchmarks in finance?
s must periodically analyse how their portfolio
is performing, by assessing the return
earned and the risk
Professional managers expect to be judged against some objective standards
for comparison. These standards are known as Benchmarks
How are benchmark portfolios used?
The most useful way to construct a benchmark is to define a Benchmark Portfolio
Benchmark portfolios may be defined for special purposes, or based on standard products.
Note that the Active Weight
for a given portfolio in any asset can then be defined as:
Active weight = Portfolio weight - Benchmark weight
How do you construct a benchmark portfolio?
Benchmark portfolios should be constructed in order to create a view of performance which is consistent with the market
which is being described. The outcome is usually called an Index
Many companies specialise in creation of investment indices e.g. MSCI
, Dow Jones