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How does one create a benchmark for a portfolio?

I realize if I were using strategic asset allocation, I could just look at the already existing benchmarks associated with the various asset classes in my portfolio and create my benchmark from some weighted average of those.

However, what if I am only considering some stocks in the S&P and am not using strategic asset allocation exactly? Would I just take the benchmark to be the weighted average of these stocks where the weights would be their market capitalizations?

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    $\begingroup$ Why so complicated? Wouldn't SPY (an ETF that tracks the S&P 500) be a suitable benchmark? It's a large cap U.S. market weighted index so it offers similar risk and return to the stocks you are selecting. $\endgroup$ – Alex C Nov 9 '15 at 3:57
  • $\begingroup$ I remember that i saw something regarding this topic under the GIPS section in the CFA curriculum. Im not sure if its available online but its worth giving it a try @jojo $\endgroup$ – Rime Nov 9 '15 at 4:34
  • $\begingroup$ In the CFA curriculum they say that a benchmark must be: -Specified in advance : Benchmark is known to all at start of evaluation period, -Appropriate : The benchmark should accurately reflect the manager’s investment style, -Measurable : You must be able to measure the results accurately, -Unambiguous : A good benchmark’s components should be known -Reflective of current investment thinking, -Owned : Manager should know and understand how the benchmark works -Investable : You should be able to replicate and invest in the benchmark. These criteria are pretty general. $\endgroup$ – noob2 Nov 9 '15 at 14:00

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