Benchmark
Definition · Level 8 · Risk & portfolio
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The index or portfolio a manager’s performance is judged against — e.g. the S&P 500 for US large caps. Alpha, active return, tracking error and the information ratio are all measured relative to it.
Example
Fund +12%, S&P 500 +10% → +2% active return.
Where Tradecraft teaches it
Level 8 · Risk & portfolio, in the lesson “Volatility, beta & risk-adjusted returns”: Annualize vol, read beta, alpha and correlation, compute two-asset portfolio vol and the risk ratios.
Related terms
- AlphaReturn earned above what the asset’s market exposure predicts: Rp − [Rf + β(Rm − Rf)].
- Calmar ratioAnnualized return divided by the absolute value of the maximum drawdown, usually over the last three years.
- CorrelationStandardized co-movement of two return series, from −1 (opposite) to +1 (lockstep): Cov ÷ (σA × σB).
- CovarianceAverage product of two assets’ deviations from their means; its sign shows the direction of co-movement but its size depends on each asset’s…
- DiversificationCombining imperfectly correlated assets so the portfolio’s volatility is below the weighted average of the individual volatilities; the benefit…
- Information ratioActive return (portfolio minus benchmark) divided by tracking error; skill per unit of active risk.