Benchmark Design for an Active Investment Process
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Most equity funds are benchmarked to market capitalisation weighted indices. A large investor may wish to design nonmarket capitalisation weighted benchmarks to maximise the benefit to the investor of the stock picking ability of active portfolio managers. We introduce a generic modelling framework which takes sector characteristics, manager skill, risk-taking appetite and market states into consideration. Our simulations may guide the design of customized benchmarks which offer investment capacity and increase the benefit of an active investment process.
PublisherNorges Bank Investment Management