Measuring performance
Benchmark
The index or reference portfolio you measure yourself against, to see whether your decisions added anything.
How it works
A return without a benchmark is uninterpretable. 12% is excellent in a year the market returned 4% and poor in one where it returned 22%.
A fair benchmark matches the thing being measured: same asset class, same region, same size profile, same currency. Anything else is measuring a style difference and calling it skill.
Where it misleads people
A benchmark you always beat is the wrong benchmark. If the comparison never makes you uncomfortable, it has been chosen to flatter rather than to test.
Related terms
- AlphaReturn above what the risk taken would ordinarily have earned — the part attributable to skill.
- Tracking errorHow much a portfolio’s returns deviate from its benchmark, measured as the volatility of the difference.
- IndexA rules-based list of securities used to represent a market or segment of one.
- Total returnThe full return from an investment: price change plus every dividend or interest payment received.
- Active shareHow much a fund’s holdings differ from its benchmark, as a percentage.
Mentioned in
More in Measuring performance
- CAGR
- Behaviour gap
- Calmar ratio
- Backtest
- Contribution to return
- Annualised
- Equity risk premium
- Yield on cost
All 29 Measuring performance terms · The full glossary, 433 terms
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