datamonkey’s post re: benchmarks is below. I am going to list the type of benchmark followed by the letter(s) from SAMURAI that I think does NOT apply. Could someone complete/edit my list? I can see this appearing as an essay or at least a MC. (= x means the following do not apply) 1. Manager Universe = x S,I 2. Broadbased Index = perfect? 3. Factor Model based =x S, A? 4. Custom Security = perfect? 5. Absolute = x, R, I 6. Returns based = x, S,U,R,I 7. Style Indices = x, S,U,R,I I know I got some wrong…corrections/edits? ----------------------------------------------------------------------------------------------------------------- (datamonkey): ALL ABOUT Benchmarks We all know SAMURAI now… SAMURAI - Properties of a VALID benchmark S - Specified in Advance A - Appropriate M - Measurable U - Unambiguous R - Reflects Current Investment Conditions A - Accountable I - Investable TYPES of Benchmarks - “My Black Ferrari CARS” M - Managers Universe B - Broad Based Index F - Factor Model Based C - Custom Security A - Absolute R - Returns-Based S - Style Indexes
Manager Universe: When it cannot be specified in advance, you cannot make sure of Appropriatness & whether it is reflective of manager’s current investment knowledge.
Schweser claims Manager Universe is only Measurable, none of the other properties apply. >2. Broadbased Index = perfect? Nope, might be not appropriate to your investment style and might be not investable (if you are not allowed to hold certain securities in your portfolio that are in the index) >3. Factor Model based =x S, A? also might be not investable >4. Custom Security = perfect? Yep, I believe the only “perfect” one is Custom benchmark.
Yeah, CFAI notes custom benchmarks as the best, satisfying all criteria, and points out some deficiencies regarding all the others with respect to validity criteria for benchmarks.
tanyusha Wrote: ------------------------------------------------------- > Schweser claims Manager Universe is only > Measurable, none of the other properties apply. > > >2. Broadbased Index = perfect? > Nope, might be not appropriate to your investment > style and might be not investable (if you are not > allowed to hold certain securities in your > portfolio that are in the index) > > >3. Factor Model based =x S, A? > also might be not investable > Umm how is it not specified in advance? How is it not investable? > >4. Custom Security = perfect? > Yep, I believe the only “perfect” one is Custom > benchmark.
>how is it not specified in advance? b/c you need historical account exposures to come up with factor model? (just a guess)
With factor based, you might just specify the factor exposures and leave the specific securities blank. Or you might base your factors based benchmark on specified securities. In the first case it is not umbagious. You can have same factor exposures and end up with quite different returns. In the second case it would be both unambigious and investable.
Hiya Turkiya Wrote: ------------------------------------------------------- > With factor based, you might just specify the > factor exposures and leave the specific securities > blank. > > Or you might base your factors based benchmark on > specified securities. > > In the first case it is not umbagious. You can > have same factor exposures and end up with quite > different returns. > > In the second case it would be both unambigious > and investable. Exactly, so what is the definition of factor based benchmark vs custom benchmark? I thought factor models can be used to create a benchmark and that is what is called a factor based model benchmark…
ok so here is my summary based on the comments above: (=x means the following do not apply) 1. Manager Universe = only measurable 2. Broadbased Index = might be not appropriate to your investment style and might be not investable (if you are not allowed to hold certain securities in your portfolio that are in the index) 3. Factor Model based = can be spec in advance, if not it is ambiguous and not investable 4. Custom Security = perfect 5. Absolute =x, R, I 6. Returns based =x, S,U,R,I 7. Style Indices =x, S,U,R,I
Manager universe is only measurable AFTER THE FACT.