Can someone please explain me the difference between a multifactor-model-based benchmark and a returns-based benchmark?
It’s probably not the same thing at all but I don’t get it. Thanks!
Ok I see. These are two totally different types of input variables in the two different models. It makes total sense. Thanks!
May I add that while the return-based benchmak can be considered as a valid one because it fulfills out all the basic characteristics i.e.
Investable, measurable, unambiguous, owned, known in advance, appropriate, reflective of current investment opinion, the Multifactor based
model is usually not considered as valid because it’s either ambigous (given all the variables used) and/or not investable.
Finally the curriculum mentions three valid types of benchmarks :
-> Broad market indexes;
-> Returns-based ;
-> Custom-security based (most expensive)
Agreed?
if i’m not mistaken, the returns-based takes into consideration the manager’s past return of a set of assset or so…
Multifacto can contemplate variables such as valuation (p/e; p/bv), capitalization, etc…
Yes, agreed!
For the list of three valid benchmarks, I couldn’t confirm completeness though, I would need to go back to the course to see if there is no other possible valid benchmark, but from the top of my head, I can’t think of any other one.
I would also add that these are " potentially" valid benchmarks, as they could be valid in one case for a given manager but not for another (as “appropriate”, “reflective of current inv. opinions” and “owned” are three criteria of a valid benchmark that will be met or not depending on the context). The other types of benchmarks are just invalid “by nature”, no matter what the context is. But I guess I am not teaching you anything here.
Merci Myriam!