Definition
Benchmarks serve as performance yardsticks and investment policy guides. A good benchmark is investable, unambiguous, measurable, appropriate to the strategy, and specified in advance. Common benchmarks include S&P 500 (large-cap US equity), Bloomberg Aggregate (US bonds), and MSCI EAFE (international developed equity).
lightbulb Example
A US large-cap growth fund uses the Russell 1000 Growth Index as its benchmark. Over 5 years, the fund returns 14.2% vs benchmark 12.8%—the 1.4% annualized outperformance suggests meaningful alpha generation.
verified_user Key Points
- Must be investable, measurable, and appropriate
- Specified in advance (not chosen after the fact)
- S&P 500 is the most common US equity benchmark
- Benchmark selection affects alpha measurement