Benchmarking Performance Evaluation in Portfolio Management

Very Hard Performance Evaluation Benchmarking

John is a portfolio manager responsible for managing a mutual fund that primarily invests in large-cap U.S. equities. After one year, John’s fund has returned 10%, while the benchmark index, the S&P 500, has returned 12%. To evaluate John's performance effectively, he needs to consider appropriate benchmarks.

Which of the following statements about benchmarking and performance attribution is correct?

A benchmark should always be the same as the investment strategy to ensure direct comparability.

Using a benchmark that consists of similar securities and asset classes allows for more accurate performance evaluation.

It is advisable for fund managers to select benchmarks that have historically underperformed to highlight their portfolio's outperformance.

Hint

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