Benchmark Error
Definition of 'Benchmark Error'A situation in which the wrong benchmark is selected in a financial model. This error can create large dispersions in an analyst or academic's data, but can easily be avoided by selecting the most appropriate benchmark at the onset of an analysis. |
|
Investopedia explains 'Benchmark Error'When creating a market portfolio under the capital asset pricing model (CAPM), it is important to use the most appropriate benchmark, or market, in your calculations. If, for example, you want to create a portfolio of American stocks using the CAPM, you would not use the Nikkei - a Japanese index - as your benchmark.Accordingly, if you want to compare your portfolio returns, you should use an index that contains similar stocks. For example, if your portfolio is tech-heavy, you should use the Nasdaq as your benchmark, rather than the S&P 500. |
Related Definitions
Articles Of Interest
-
Long-Term Investing: Hot Or Not?
Forget the latest craze - you're more likely to succeed with a buy-and-hold strategy. -
The Hidden Differences Between Index Funds
These funds don't all match index returns. Find out how to avoid costly surprises. -
Benchmark Your Returns With Indexes
If your portfolio is always falling short, you may not be making an apples-to-apples comparison. -
Is it possible to invest in an index?
First, let's review the definition of an index. An index is essentially an imaginary portfolio of securities representing a particular market or a portion of it. When most people talk about how ... -
Weighted Average Cost Of Capital (WACC)
Weighted average cost of capital may be hard to calculate, but it's a solid way to measure investment quality -
Exploring The Current Account In The Balance Of Payments
Learn how a country's current account balance reflects the country's economic health. -
Taking Shots At CAPM
Find out why many investors think the capital asset pricing model is full of holes. -
George Soros: The Philosophy Of An Elite Investor
George Soros spent decades as one of the world's elite investors, and even he didn't always come out on top. But when he did, it was spectacular. -
Understanding And Playing The Dow Jones Industrial Average
Learn strategies for investing in this price-weighted index and how to interpret its movements. -
Introduction To International CAPM
ICAPM is one of several models used to determine the required return on an asset, discover its limitations and how to use it.
Free Annual Reports