Practical Applications of Do You Know What’s in Your Benchmark?

Abstract

While building benchmarks against which to measure their portfolios can be a straightforward process for most practitioners, this isn’t the case for managers of illiquid portfolios. Practitioners and academics may be unknowingly exposing themselves to problematic assumptions contained in the underlying benchmark return methodology used by the Center for Research in Security Prices (CRSP) .

This Practical Applications report highlights three main problems identified by the authors of Do You Know What’s in Your Benchmark? , from the Spring 2013 issue of The Journal of Portfolio Management .

“These current issues with the benchmarks weren’t necessarily relevant when CRSP started in the sixties,” Richard Price , Assistant Professor of accounting at the John S. Huntsman School of Business at Utah State University , says in an interview.

Prices co-authored the article with Steven Crawford , Assistant Professor of accounting at Rice University’s Jones Graduate School of Business in Houston and James Hansen, Assistant Professor of accounting at the University of New Mexico’s Anderson School of Management .

TOPICS: Financial crises and financial market history, exchange-traded funds and applications, real estate