Definition
A benchmark is a reference point for evaluating portfolio performance. It should reflect the portfolio's investment style and holdings. The S&P 500 benchmarks U.S. large-cap equity; Bloomberg Aggregate benchmarks U.S. bonds. Active managers are judged on ability to outperform their benchmark after fees.
Formula
Active Return = Portfolio Return - Benchmark Return
Example
A large-cap fund returned 12% vs. S&P 500's 10%. It outperformed its benchmark by 2% (200 basis points).
FAQ
What is Benchmark?
A standard against which investment performance is measured.
How do you calculate Benchmark?
A common formula for Benchmark is: Active Return = Portfolio Return - Benchmark Return
Why is Benchmark important?
Benchmark helps investors evaluate portfolio management and make more informed decisions.