Explanation:
The correct answer is A.
A sound benchmark must be tradable, meaning it can be replicated in the market as a viable passive alternative. If a benchmark cannot be traded (i.e., it holds illiquid securities or is otherwise purely theoretical), any active return (alpha) calculated relative to that benchmark is an illusion. You cannot realistically determine the value added by a manager unless you compare their strategy's returns against a passive strategy that could have actually been implemented. Therefore, without a tradable benchmark, calculated alphas do not accurately represent feasible real-world performance.
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Q.3022 Tradability is one of the properties of a sound benchmark. Which of the following best explains the link between tradability and a sound benchmark?
A
If alphas are not evaluated relative to a tradable benchmark, the implementable returns on investment strategies are not a representation of the calculated alphas.
B
Both the asset owner and the fund manager are supposed to display the ability to trade the benchmark.
C
Produced by an independent asset provider, a tradable benchmark should be verifiable and not ambiguous about its contents.
D
Alphas must not be measured in relation to a tradable benchmark because if so, the computed alphas will not give the returns on investment strategies that can be implemented.
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