Explanation:
A sound benchmark must be tradable, which means it represents an investable, practical alternative to the active manager's portfolio. If alphas are calculated relative to an untradable benchmark, they are merely theoretical and not actionable in real-world scenarios. Thus, measuring against a tradable benchmark ensures that the calculated alphas represent realistically achievable returns on investment strategies.
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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.