Beta (finance) - Choice of Benchmark

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.