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 techheavy, you should use the Nasdaq as your benchmark, rather than the S&P 500.

Nasdaq
A global electronic marketplace for buying and selling securities, ... 
Nikkei
Short for Japan's Nikkei 225 Stock Average, the leading and mostrespected ... 
Model Risk
A type of risk that occurs when a financial model used to measure ... 
Capital Asset Pricing Model  CAPM
A model that describes the relationship between risk and expected ... 
Standard & Poor's 500 Index  S&P ...
An index of 500 stocks chosen for market size, liquidity and ... 
Benchmark
A standard against which the performance of a security, mutual ...

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