A benchmark is a reference point used to compare the performance of an investment portfolio. The chosen index should accurately reflect the investment strategy and asset class.
Why is Option D Correct?
A benchmark must represent a realistic investment alternative to compare against the portfolio.
If a portfolio invests in UK equities, an appropriate benchmark would be the FTSE 100 or FTSE All-Share Index.
If a portfolio invests globally, a relevant benchmark could be the MSCI World Index.
Why Not Other Options?
A (Client familiarity) → While clients may know an index, this does not mean it is the best benchmark.
B (Avoiding difficulty) → Constructing a benchmark must be based on investment strategy, not convenience.
C (Removing tracking error) → No benchmark eliminates tracking error; it only measures it.
???? Reference: CFA Institute (Benchmark Selection), CISI Wealth & Investment Management.
