The portfolio performance measure that can be most affected by a benchmark error is the Sharpe measure.

Question

Quizplus · Accepted Answer

The Sharpe ratio is primarily affected by the risk-free rate, the portfolio's return, and the portfolio's standard deviation, not by a benchmark error. Benchmark errors most directly affect relative performance measures such as alpha in the Capital Asset Pricing Model (CAPM), which directly compare portfolio performance to a benchmark.

The Portfolio Performance Measure That Can Be Most Affected by a Benchmark