Kaplan B2. page 254. What’s the difference between 2 and 5…Thanks. A valid benchmark will be: 1. Specified in advance. The benchmark is known to both the investment manager and the fund sponsor. It is specified at the start of an evaluation period. 2. Appropriate. The benchmark is consistent with the manager’s investment approach and style as well as the portfolio’s objectives and constraints. 3. Measurable. Its value and return can be determined on a reasonably frequent basis. 4. Unambiguous. Identities and weights of securities constituting the benchmark are clearly defined. 5. Reflective of the manager’s current investment opinions. The manager has current knowledge and expertise of the securities within the benchmark. 6. Accountable. The manager(s) should accept the applicability of the benchmark and agree to accept differences in performance between the portfolio and benchmark as reflecting active management. 7. Investable. It is possible to invest in the benchmark as an alternative to active management.

Approach versus Knowledge of the benchmark

Approach: An equity manager may have to approach an investment knowing he has liabilities on within 7 years which means they may invest in more liquid blue-chip stocks that pay good dividends. He might use the S&P500 as a benchmark since it fits the portfolios objectives, constraints and liquidity concerns. (“safe”, large-cap, good dividends)

Knowledge: He’s knowledgable about the S&P500 because he has 10 years of experience of investing in large-cap equities in the USA and has a good fundamental understanding of the components within the index. He’s an expert in equities, therefore the S&P500 could be a good benchmark since it fits his experience and knowledge.

  1. Is about style (e.g., growth).

5 is about specific coverage (e.g., tech/industrials)

Thanks both. Not sure from 1-7 Capital letter “SAMURAI” is intentional or accidental, interesting~