Benchmark is a “standard” for analysing and measuring the direction a portfolio’s risk and return will move in the medium and long term. This term can have different nuances, depending on how it is used:
- From an investor's viewpoint it is a tool that can help select investment(s) best suited to their goals, investing styles and risk tolerance. It can also act as a target for fund managers to outperform, a tool for evaluating their performance, and in a general sense, a benchmark index that can be used to evaluate the performance of one's own investment decisions.
- From the fund manager’s viewpoint, it is a "reference portfolio" on which investment strategies are based and forecasted.
- From the legislature's viewpoint, it is a regulatory instrument that fund companies are obliged to use to inform investors of investment characteristics, including risk tolerance and expected returns on the basis of the prospectus.
The VAR benchmark is a relative risk indicator that determines the maximum loss compared to a given benchmark. It functions to assess risk appetites relative to the VAR, even between products that use different benchmarks.