Benchmark Error

AAA

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 TERMS
  1. Nasdaq

    A global electronic marketplace for buying and selling securities, ...
  2. Nikkei

    Short for Japan's Nikkei 225 Stock Average, the leading and most-respected ...
  3. Model Risk

    A type of risk that occurs when a financial model used to measure ...
  4. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected ...
  5. Standard & Poor's 500 Index - S&P ...

    An index of 500 stocks chosen for market size, liquidity and ...
  6. Benchmark

    A standard against which the performance of a security, mutual ...
Related Articles
  1. Investing Basics

    Long-Term Investing: Hot Or Not?

    Forget the latest craze - you're more likely to succeed with a buy-and-hold strategy.
  2. Mutual Funds & ETFs

    The Hidden Differences Between Index Funds

    These funds don't all match index returns. Find out how to avoid costly surprises.
  3. Mutual Funds & ETFs

    Benchmark Your Returns With Indexes

    If your portfolio is always falling short, you may not be making an apples-to-apples comparison.
  4. Investing

    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 ...
  5. Trading Strategies

    How can retirees protect their wealth in a bear market?

    Look at some helpful hints about how to protect your retirement nest egg when the stock market is underperforming or the economy is in recession.
  6. Fundamental Analysis

    What is the affect of the invisible hand on consumers?

    Discover how consumers help initiate and benefit from the invisible hand of the market, which naturally coordinates trade in an exchange economy.
  7. Economics

    How does the invisible hand phenomenon affect investment markets?

    Read about how the invisible hand of the market coordinates investment markets and provides social benefit and why its effects are distorted along the way.
  8. Fundamental Analysis

    What are some examples of economies of scale?

    Take a look at different examples of economies of scale, including how marginal costs can be reduced through external and internal factors.
  9. Fundamental Analysis

    How can quantitative easing be effective in the economy?

    Take a deeper look at the impacts of the Federal Reserve's large scale asset purchase plan, better known as quantitative easing, or QE.
  10. Fundamental Analysis

    Cash Flow From Operating Activities

    Cash flow from operating activities is a section of the Statement of Cash Flows that is included in a company’s financial statements after the balance sheet and income statements.

You May Also Like

Hot Definitions
  1. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  2. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  3. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  4. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  5. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  6. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
Trading Center