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Benchmark

• Is the standard to measure, monitor, price or evaluate a security or derivative. The treasury market is the benchmark for the corporate, mortgage backed, international and emerging credit markets. Here, securities are priced in terms of yield pickup relative to a comparable treasury. This comparability is often in terms of maturity though duration or average life become more meaningful for securities which have option characteristics.

• The performance of a predetermined set of securities, for comparison purposes. Such sets may be based on published indexes or may be customized to suit an investment strategy.

• A comparative base for measuring the performance or risk tolerance of the investment portfolio. A benchmark should represent a close correlation to the level of risk and the average duration of the portfolio's investments.

 
 Embedded terms in definition
 Average life
Average
Close
Correlation
Credit
Derivative
Duration
Investments
Market
Maturity
Monitor
Mortgage
Option
Pickup
Portfolio
Risk
Securities
Security
Yield
 
 Referenced Terms
 Adjustable rate mortgage: Is a loan which has a coupon or interest rate that is subject to change on predetermined reset dates. These loans use interest rate indices as the Benchmark rate. Adjustable Rate Mortgages come in many variations. Typically, the reset dates recur every 1, 3, or 5 years; but there are other periods used as well. These loans may have cap and floor features which constrain each reset change in interest rates. There may also be lifetime cap and floor features. Adjustable Rate Mortgages may be strictly amortizing though some have negative amortization features.A mortgage whose interest rate changes periodically based on the upward or downward movement of a specified Benchmark, e.g. six month or one-year Treasury bills.

 Adjustable rate mortgage: Is a loan which has a coupon or interest rate that is subject to change on predetermined reset dates. These loans use interest rate indices as the Benchmark rate. Adjustable Rate Mortgages come in many variations. Typically, the reset dates recur every 1, 3, or 5 years; but there are other periods used as well. These loans may have cap and floor features which constrain each reset change in interest rates. There may also be lifetime cap and floor features. Adjustable Rate Mortgages may be strictly amortizing though some have negative amortization features.A mortgage whose interest rate changes periodically based on the upward or downward movement of a specified Benchmark, e.g. six month or one-year Treasury bills.

 Agency basis: A means of compensating the broker of a program trade solely on the basis of commissionestablished through bids submitted by various brokerage firms. Agency incentive arrangement. A means of compensating the broker of a program trade using Benchmark prices for issues to be traded in determiningcommissions or fees.

 Alpha: Is a measure of the incremental reward (or loss) that an investor gained in relation to the market. Typically, this is measured as performance of a selected portfolio relative to a market Benchmark. An enhanced S&P 500 portfolio might have an alpha of .25 which means that the pickup was .25% or a quarter point better than the standard.A measure of selection risk (also known as residual risk) of a mutual fund in relation to the market. A positive alpha is the extra return awarded to the investor for taking a risk, instead of accepting the market return. For example, an alpha of 0.4 means the fund outperformed the market-based return estimate by 0.4%. An alpha of -0.6 means a fund's monthly return was 0.6% less than would have been predicted from the change in the market alone. In a Jensen Index, it is factor to represent the portfolio's performance that diverges from its beta, representing a measure of the manager's performance.

 Base interest rate: Related: Benchmark interest rate.

 
 Related Terms
 Benchmark error
Benchmark interest rate
Benchmark issues
Sharpe benchmark

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