LOS f, (Part 1): Discuss the properties of a valid benchmark.

Q1. Which of the following is least likely to be a property of a valid benchmark?

A)   The weights of the securities in the benchmark should be based on market values.

B)   The benchmark is consistent with the manager’s style.

C)   It is possible for the investor to replicate the benchmark.

Q2. One of the properties of a valid benchmark is that it be reflective of current investment opinion. Which of the following is the most accurate explanation of this property?

A)   The manager should have knowledge of the securities in the benchmark.

B)   The manager should accept the applicability of the benchmark.

C)   The securities in the benchmark should be those favored by a majority of analysts.

Q3. Which of the following is NOT regarded to be an essential characteristic of a valid benchmark?

A)   Appropriate to the manager’s investment approach and style.

B)   Reflective of past investment opinion.

C)   Specified in advance.

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Q1. Which of the following is least likely to be a property of a valid benchmark?

A)   The weights of the securities in the benchmark should be based on market values.

B)   The benchmark is consistent with the manager’s style.

C)   It is possible for the investor to replicate the benchmark.

Correct answer is A)

The security weights in a benchmark should be clearly identified but there is no stipulation that a valid benchmark have security weights based on market values.

Q2. One of the properties of a valid benchmark is that it be reflective of current investment opinion. Which of the following is the most accurate explanation of this property?

A)   The manager should have knowledge of the securities in the benchmark.

B)   The manager should accept the applicability of the benchmark.

C)   The securities in the benchmark should be those favored by a majority of analysts.

Correct answer is A)

The property that a benchmark should be reflective of current investment opinion refers to the fact that the manager should have knowledge and expertise of the securities in the benchmark. That the manager should accept the applicability of the benchmark refers to the accountable property of a valid benchmark.

Q3. Which of the following is NOT regarded to be an essential characteristic of a valid benchmark?

A)   Appropriate to the manager’s investment approach and style.

B)   Reflective of past investment opinion.

C)   Specified in advance.

Correct answer is B)

The benchmark has seven characteristics. All of the above are included with the exception of ‘reflective of past investment opinion,’ it should be reflective of current investment opinion, and the manager should have current knowledge and expertise of the securities in the benchmark.

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