A portfolio manager is evaluating a global balanced portfolio (60% equities, 40% fixed income) that invests in various countries. The current benchmark is solely the S&P/TSX Composite Index. Why is this benchmark inappropriate, and what would be a better alternative or combination of benchmarks?

Question: A portfolio manager is evaluating a global balanced portfolio (60% equities, 40% fixed income) that invests in various countries. The current benchmark is solely the S&P/TSX Composite Index. Why is this benchmark inappropriate, and what would be a better alternative or combination of benchmarks?

Answer options: ✅ The S&P/TSX Composite only covers Canadian equities, ignoring fixed income and global exposure; a composite of global equity and global bond indices would be better.

• The S&P/TSX Composite is too volatile; a less volatile benchmark like a GIC ladder would be more suitable.
• The S&P/TSX Composite does not account for currency fluctuations; a CAD-hedged global equity index is sufficient.
• The S&P/TSX Composite focuses on large-cap stocks; a small-cap Canadian index would provide more accurate comparison.

Correct answer: The S&P/TSX Composite only covers Canadian equities, ignoring fixed income and global exposure; a composite of global equity and global bond indices would be better.

Explanation: The S&P/TSX Composite Index is inappropriate because it only represents Canadian equities and does not account for the portfolio's significant fixed income and global equity exposure. A more suitable benchmark would be a composite benchmark reflecting the actual asset allocation, such as combining a global equity index and a global bond index.