What Is a Benchmark in Finance?

Financial benchmarking involves running financial analyses in order to compare business practices and the standards of a firm to other firms within the same industry.

A benchmark is a standard, or a baseline, that’s used for comparative purposes when assessing a portfolio or mutual fund.

What is a Benchmark in a Portfolio?

Benchmarks are used to analyze and manage allocation, risk, and the given returns of a portfolio. They can also be used to assess how a portfolio is performing against different market segments. To track the performance of an asset group, companies use indexes, such as the S&P 500, which is broad and captures the whole market, or a more specialized index that tracks a specific industry. 

What are the Types of Financial Benchmarking?

There are two different types of financial benchmarking – internal and external. Internal benchmarking compares the performance of different stocks within the same portfolio, while external benchmarking compares total portfolio performance to other portfolios that are either in the same industry or different industries.

 

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