Explain two different weaknesses that of using each of the three benchmarks to measure the performance of a portfolio.

Investment Analysis and Portfolio management

Question

This question is on benchmarks Tim Maud is an equity portfolio manager for Acme’s pension plan; the portfolio he manages for Acme is currently invested in 100 percent domestic securities. The Board of Trustees has urged Maud to investigate pursuing global investments.

Maud is deciding whether or not to add international equity securities to the portfolio. Maud has identified an international developed market for possible investment. He has decided to pursue an investment strategy that is invested 50% domestic market and 50% international developed market.

During the annual review of Acme’s pension plan, several Trustees questioned Maud about various aspects of performance measurement and risk assessment.

In particular, one Trustee asked about the appropriateness of using each of the following benchmarks:

Market index
Benchmark custom portfolio
Median of the manager universe

Can you explain two different weaknesses that of using each of the three benchmarks to measure the performance of a portfolio.

And can you describe three properties that a valid benchmark should have?

Formulae

Roptimal = Rneutral +[0.5×(GDPgforecast −GDPgtrend)+0.5 ×(Iforecast − Itarget )]

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