Why would a composite benchmark be needed to measure portfolio performance?

Why would a composite benchmark be needed to measure portfolio performance?
A . It makes it easier for the fund manager
B . Because the portfolio spans several asset classes
C . Because the portfolio forms part of the investment universe
D . To lower the tracking error

View Answer

Answer: B

Explanation:

Need for a Composite Benchmark:

Portfolios that span multiple asset classes (e.g., equities, bonds, commodities) require a composite benchmark to provide a fair performance comparison.

Single benchmarks (e.g., S&P 500) would not accurately represent multi-asset portfolios.

Elimination of Other Options:

A: Composite benchmarks complicate fund management rather than simplify it.

C: While portfolios are part of the investment universe, this does not necessitate a composite benchmark.

D: Reducing tracking error is a goal but not the main reason for composite benchmarks.

Reference: ICWIM Module 3: Details on portfolio management and benchmark selection for performance measurement.