Properties of an effective benchmark. Although in practice, a benchmark is usually chosen by the portfolio manager in a way that's acceptable to the investor or fund sponsor, and hopefully it fairly represents the manager's investment process. However, to a function effectively in performance evaluation which is the goal here a benchmark should contain certain basic properties. First, it should be unambiguous or transparent. Everyone should know the constituents, the weightings and the factors within that benchmark. Two, it should be investible which means it should be comprised of holdings that an investor can easily purchase and hold on their own. You would think that goes without saying but for some benchmarks, it's not feasible to invest in all of the underlying holdings. Next, measurable. Ideally, it would be a benchmark that you can calculate easily and fairly often, the best benchmarks like indexes have the ability to be priced on a daily basis. Next, it should be appropriate. What does that mean? Well, it should be in line with the portfolio manager strategy meaning it should have a similar risk profile should have similar exposures and it should have similar sources of return. Next, it should have historical data available. We should be able to analyze past returns to truly get a gauge on whether the benchmark is appropriate for the investment strategy and last it should be specified in advance. It should be chosen before the evaluation period and not be modified after the reporting period. In fact, a change in a benchmark by a portfolio manager could be seen by some as a red flag as a manager trying to massage the data in a way to show themselves in the best light.