Evaluating Benchmark Appropriateness

Medium Performance Evaluation Benchmarking

Sarah is a portfolio manager at a mid-sized investment firm. She has constructed a diversified portfolio that focuses on large-cap equities and bonds over a five-year horizon. To evaluate the performance of her portfolio, she chose a benchmark composed of 70% S&P 500 Index and 30% Bloomberg Barclays U.S. Aggregate Bond Index. Sarah has recently read an article suggesting that using a composite benchmark might not accurately reflect the unique risk and return characteristics of her portfolio.

Which of the following statements provides the best rationale for the appropriateness of using the selected benchmark to evaluate Sarah's portfolio performance?

The benchmark reflects a mix of both equity and fixed-income investments, which aligns with the asset allocation of Sarah's portfolio.

The S&P 500 Index alone represents the entire market, making it a more suitable benchmark than a composite index.

Using a custom benchmark is irrelevant as long as the portfolio manager demonstrates good performance.

Hint

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