Advanced Diploma of Financial Planning (ADFP) Practice Test

Which of the following is NOT a common characteristic of a good benchmark?

1. Ambiguity

2. Investable

3. Measurable

4. Reflective of current investment opinions

The correct answer is: Ambiguity

A good benchmark is essential for evaluating the performance of investments and must possess certain key characteristics. Ambiguity is not a desirable trait in a benchmark because it can lead to confusion and unpredictability in performance assessments. A benchmark should clearly define its underlying assets and the methodology used to create it, allowing for transparent comparisons. In contrast, a quality benchmark is investable, meaning that investors can replicate its performance through actual investment strategies. It is also measurable, which indicates that its performance can be quantified over time using clear criteria, enabling effective performance evaluation. Furthermore, a good benchmark is reflective of current investment opinions, aligning with the prevailing market conditions and sentiments, thus providing a relevant standard for comparison. Therefore, ambiguity stands apart from these essential qualities, making it correct to identify it as a characteristic that does not belong in the context of a good benchmark.