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Multi-Asset Investing: A practical guide to modern portfolio management by Yoram Lustig

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2. Benchmarks

Setting a benchmark

Return objectives must be linked to the investor goals and liabilities. Setting a benchmark closely reflecting the goals and liabilities (i.e. the investment policy) and then managing the portfolio relative to this benchmark links the portfolio to the investment objectives and allows the evaluation and monitoring of investment results. The portfolio objectives can be stated as an outperformance target and a relative risk (tracking error) with respect of the benchmark, linking the portfolio to the benchmark, and consequently to the investor goals and liabilities.

When the investment objectives are relative the portfolio return is compared to that of an index or a basket of indices (composite benchmark). ...

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