Benchmark - Financial definition
Concise definition of the term benchmark
In finance, a benchmark is a standard or point of reference against which the performance of a security, investment portfolio, or fund can be measured.
Comprehensive definition of the term benchmark
A benchmark in finance serves as a comparative tool to evaluate the performance of various financial instruments, portfolios, or funds. It is often an index, such as the S&P 500 or MSCI World Index, representing a specific market segment or the entire market. Investors and fund managers use benchmarks to gauge the effectiveness of their investment strategies, make informed decisions, and ensure they meet or exceed market returns.
For example, an equity mutual fund might use the S&P 500 as a benchmark to compare its performance against the overall performance of large-cap U.S. stocks. Benchmarks are critical in assessing risk-adjusted returns, enabling investors to understand whether returns are due to skillful management or market movements.