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.
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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)
“Then did they strive with emulation who should repeat most wise maxims importing the necessity of suspicion in the choice of our friends—such as “mistrust is the mother of security,” with many more to the same effect.... But notwithstanding the esteem which they professed for suspicion, yet did they think proper to veil it under the name of caution.”
—Sarah Fielding (1710–1768)