Benchmark Portfolios

Benchmark Portfolios

A benchmark portfolio is a standard against which the performance of an investment portfolio can be measured. It is a portfolio of securities or other assets that represents a particular market or sector. The purpose of benchmark portfolios is to provide a point of reference for investors to compare the performance of their portfolio with that of the market or a particular sector.

For example, if an investor has a portfolio of stocks, they may choose to compare its performance with a benchmark portfolio such as the S&P 500, which is a portfolio of 500 large-cap stocks representing the US stock market. By comparing the returns of their portfolio with the benchmark portfolio, investors can evaluate whether their portfolio is outperforming or underperforming the market. This information can be used to make informed investment decisions and adjust the portfolio as necessary. Benchmark portfolios are an important tool in portfolio management for both individual and institutional investors.

• Sharpe: T-bills, intermediate-term government bonds, long-term government bonds, corporate bonds, mortgage related securities, large-capitalization value stocks, large-capitalization growth stocks, medium-capitalization stocks, small-capitalization stocks, non-government. Bonds, European stocks, and Japanese stocks.
• BARRA: Uses portfolios formed around 13 different security characteristics, including variability in markets, past firm success, firm size, trading activity, growth orientation, earnings-to-price ratio, book-to-price ratio, earnings variability, financial leverage, foreign income, labor intensity, yield, and low capitalization.
• Style model: Uses portfolios formed around five different characteristics: cash (T-bills), large-capitalization growth, small-capitalization growth, large-capitalization value, and small-capitalization value.

 

Back to Tutorial