A hundred ways to skin a cat – or some practical thoughts on benchmark replication

Juliusz Jabłecki and Jacek Próchniak

The cornerstone of any reserve manager’s strategic asset allocation is the selection of a benchmark – ie, a portfolio that represents the institution’s mandate, long-term risk/return preferences and general investment guidelines (see, for instance, Box 4.1). Choosing a benchmark is critical as it typically determines the lion’s share of the variance of actual portfolio returns.

In the fixed income space, benchmarks tend to either be made up of one or several readily available broad bond indices compiled by investment banks and other external providers, or constructed in-house to more

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