Strategies - Benchmarking

It is important to determine not only the rate of return that a portfolio has earned, but also how this rate of return compares to a benchmark, such as the market. Benchmarking is the process of comparing the performance of an investor's portfolio to the market's performance over the same period of time.

The comparison between a portfolio and the market may take several forms - Absolute Returns, Risk Adjusted Returns, After-tax Returns. Generally, comparisons will be made on a risk adjusted basis. This allows the investor to see how well the portfolio performed when adjusted for the level of risk undertaken.

There are three methods which are discussed in detail (and we have a calculator for them) are:

• The Sharpe Performance Index

• The Treynor Performance Index

• The Jensen Performance Index