Choice of Benchmark
In the US, published betas typically use a stock market index such as S&P 500 as a benchmark. Other choices may be an international index such as the MSCI EAFE. The benchmark should be chosen to be similar to the other assets chosen by the investor. The ideal index would match the portfolio; for example, for a person who owns S&P 500 index funds and gold bars, the index would combine the S&P 500 and the price of gold. In practice a standard index is used. The choice of the index need not reflect the portfolio under question; e.g., beta for gold bars compared to the S&P 500 may be low or negative carrying the information that gold does not track stocks and may provide a mechanism for reducing risk. The restriction to stocks as a benchmark is somewhat arbitrary. A model portfolio may be stocks plus bonds. Sometimes the market is defined as "all investable assets" (see Roll's critique); unfortunately, this includes lots of things for which returns may be hard to measure.
Read more about this topic: Beta (finance)
Famous quotes containing the words choice of and/or choice:
“Come and take choice of all my library,
And so beguile thy sorrow.”
—William Shakespeare (1564–1616)
“Stupid or smart, there wasn’t much choice about what was going to happen to me ... Growing up was like falling into a hole.... I might not quit school, not while Mama had any say in the matter, but what difference would that make? What was I going to do in five years? Work in the textile mill? Join Mama at the diner? It all looked bleak to me. No wonder people got crazy as they grew up.”
—Dorothy Allison (b. 1953)