An appropriate benchmark should not be equally applied to all risky assets irrespective of their risk exposure. This is because different assets have different risk exposures and therefore, applying the same benchmark to all assets would not provide a fair and accurate comparison. For instance, a high-risk asset would naturally have a higher expected return than a low-risk asset. If the same benchmark is applied to both, the high-risk asset may appear to underperform when in fact it is simply taking on more risk. Therefore, it is crucial that the benchmark takes into account the risk exposure of the assets it is being compared to. This ensures that the comparison is fair and meaningful.

Choice B is incorrect. A benchmark should be replicable. This means that the performance of the benchmark can be replicated by a passive investment strategy. If a benchmark is not replicable, it would not provide a fair comparison for an active investment strategy.

Choice C is incorrect. A benchmark should be tradeable. This means that investors can buy and sell securities in the benchmark portfolio without any restrictions or limitations. If a benchmark is not tradeable, it would not reflect the true market conditions and hence, would not serve as an appropriate measure of performance.

Choice D is incorrect. A benchmark should be risk-adjusted. This means that the returns of the benchmark are adjusted for risk to provide a fair comparison with other investments which may have different levels of risk exposure. If a benchmark does not consider risk adjustment, it could potentially mislead investors about their relative performance.

Things to Remember

• Choosing an appropriate benchmark is crucial for evaluating the performance of an investment portfolio.
• Benchmarks help investors and portfolio managers assess how well their investments are performing relative to a standard or a market index.
• Replicability of a benchmark ensures that the benchmark's performance can be easily duplicated by passive investment strategies.
• Tradeability of a benchmark allows for accurate tracking of market conditions and ensures that the benchmark reflects real-world investment scenarios.
• Risk-adjustment of a benchmark is important to provide a fair comparison of investment performance, especially when comparing assets with different risk profiles.