A custom benchmark is necessary when a portfolio contains multiple asset classes, as no single index can fully represent its performance.
Why is Option D Correct?
A diversified portfolio (e.g., equities, bonds, commodities) needs a composite benchmark that reflects its asset allocation.
Example: A portfolio with 60% equities and 40% bonds might use a benchmark of 60% MSCI World Index and 40% Barclays Global Bond Index.
Why Not Other Options?
A (Easier than a pre-defined benchmark) → Custom benchmarks require more effort, not less.
B (Absolute performance measure) → Benchmarks compare performance relative to the market, not in absolute terms.
C (Tracking error measurement) → A benchmark helps measure tracking error, but the need for a custom benchmark arises due to asset diversity.
???? Reference: CFA Institute (Benchmarking), CISI Wealth & Investment Management.
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