Understanding Benchmarking in Performance Evaluation

John Smith is a portfolio manager responsible for managing a diversified equity fund. He is currently assessing the performance of his fund over the past year. To determine whether his fund outperformed the market, he decides to use the S&P 500 Index as his benchmark. A benchmark is essential in performance evaluation as it provides a point of reference for assessing the performance of a portfolio.

Which of the following statements regarding benchmarking is true?