Importance of Benchmark Selection in Performance Evaluation

As a portfolio manager for XYZ Wealth Management, you have been tasked with evaluating the performance of a diversified equity fund over the past five years. Your firm has a policy of benchmarking this fund against the S&P 500 Index, as it is a widely recognized standard for U.S. equities.

Recently, a client expressed concern about the fund's underperformance relative to the S&P 500 Index, questioning the choice of benchmark. The client suggests that the benchmark should better reflect the risk profile and investment strategy of the fund, which includes a significant allocation to mid-cap stocks and international equities.

In your response, discuss the importance of selecting an appropriate benchmark when evaluating investment performance. Include considerations of measurement, relevance, and the implications for performance evaluation. Suggest an alternative benchmark that could be more suitable for this fund and explain your reasoning.