Benchmark

The exam often hands you a scenario and asks which property a proposed benchmark violates — common tells are a benchmark the manager never agreed to up front (fails specified in advance), one holding securities the manager can’t actually buy (fails investable), or a broad index whose style mismatches the portfolio (fails appropriate). The hinge: a valid benchmark must be specified in advance and investable, so peer-group / median-manager benchmarks are a favorite wrong answer — they’re ambiguous, set only after the fact, not investable, and skewed by survivorship bias.

Don’t conflate the benchmark with the active risk measured against it: the benchmark is the reference, while active risk gauges deviation from it. A passive fund minimizes that deviation; an active manager accepts it to pursue alpha. Separately, distinguish benchmark choice from strategic asset allocation — allocation explains most of return variability across periods, whereas the benchmark sets how that performance is judged. Memory hook: SAMURAI guards a fair fight.