Question

Assuming that the mandate to a portfolio manager was to invest in a broadly diversified portfolio of U.S. stocks, which two or three indexes should be considered as an appropriate benchmark? Why?

Answer 1

Indexes are used as a benchmark to evaluate portfolio performance. In this case, we must be sure the index is consistent with our investing universe. If we are investing worldwide, we should not judge our performance relative to the DJIA which is limited to 30 US Blue-chip stocks. The most widely followed stock on the Benchmark indexes NASDAQ composite, the Wilshire 5000, S&P 500 and the NYSE Composite.

These indexes would be appropriate for portfolio managers wishing to construct a broadly diversified portfolio. The benchmark chosen should be similar to other assets chosen by the investor. The ideal index would match the portfolio. Normally, a standard index is used.