Question

Discuss the three different ways a financial manager can choose a benchmark. Provide an example for each.

Answer 1

A financial Manager can choose benchmark several ways:

1) Choosing the benchmark index of the country. If the financial manager is managing a domestic fund, he can choose country's benchmark index (S&P 500 for US) as it's benchmark index and compare his fund's performance with this index.

2) Choosing the composite sector index: If the financial manager is managing a fund which focuses on a particular sectors, he can choose the composite sector index as his benchmark (E.g. for USA if a fund manager focuses on banking sector he can set IXBK as his benchmark index)

3) Choosing the composite large/mid/small cap index: If a fund manager is focused on managing large cap, mid cap or small cap fund, he can choose that type stock's composite index as it's benchmark index. E.g. If a fund manager is focused on large cap fund in USA, he can choose NASDAQ US 500 Large cap index as it's benchmark index.