Advanced Diploma of Financial Planning (ADFP) Practice Test

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

1. Investable

2. Unambiguous

3. Reflective of historical performance

4. Measurable

The correct answer is: Reflective of historical performance

A good benchmark serves several critical purposes in the investment process, including providing a standard for comparing the performance of a portfolio, guiding investment decisions, and informing stakeholders. The characteristic of being reflective of historical performance is not necessarily a requirement for a benchmark to be considered good. A benchmark does not need to have a historical performance record to be functional; instead, it should be forward-looking and capable of representing the goals and strategies relevant to current and future investments. In contrast, an investable benchmark is one that can be replicated through actual investment strategies, unambiguous means that the benchmark's components and methodology should be clear and easily understood, while measurable means that the benchmark can be quantified and tracked over time. These characteristics are essential as they ensure that the benchmark can be accurately used for performance evaluation and comparison, aiding in transparency and understanding for investors.