The Importance of an Accurate Benchmark Choice: The Spanish Case

The performance of a fund cannot be judged unless it is first measured, and measurement is not possible without an objective frame of reference. A benchmark serves as a reliable and consistent gauge of the multiple dimensions of performance: return, risk and correlation. The benchmark must be a fair target for investment managers and be representative of the relevant opportunity set. The objective of this paper is to analyse whether the different benchmarks generally used to measure the performance of the Spanish stock market are truly efficient, considering the importance of the selection of a benchmark in determining mutual funds' performance, investment style and risk. This study reveals that among the six representative indices considered, the Ibex-35 was the most accurate and widely used as a benchmark in this market. [PUBLICATION ABSTRACT]