Benchmarks Introduction. Now, benchmarks play a very important role in evaluating portfolio managers and their performance. After all, we can't evaluate portfolio manager in a vacuum because, by its nature, performance evaluation is a relative concept. And absolute return numbers mean very little by themselves. Consider an example. Let's say a portfolio returned 7% during any given year. Well, if you knew that the broad market declined, let's say, by 15% during that year, you might be pretty impressed. However, if the market had jumped or risen 25%, you might be somewhat disappointed. So to conduct a meaningful portfolio evaluation of a manager, then we must develop an appropriate benchmark against which a portfolio's performance can be compared. And these benchmarks are a basket of investments or risk factors that correspond to that portfolio manager strategy. And essentially what we're doing is we're comparing the portfolio to a passive version of that strategy. Now, in most cases, investors choose a market index or a combination of indexes to serve as that portfolio benchmark. And these indexes can track the passive performance of broad asset classes like US equities, or a smaller slice of the market like technology stocks. And on the equity side, the most popular benchmark used is the S&P 500 Index. While fixed income, you'll often see the US Aggregate Bond Index. Now keep in mind that for more complex strategies, an index may not be the correct passive representation of that portfolio manager's investment style or strategy. And in those cases, we need to look beyond indexes to find a proper benchmark to evaluate performance.