Toward an Optimal Domestic Large-Cap Equity Index

Abstract

Choosing a benchmark for domestic large-cap equities is critical for plan sponsors because benchmarks play an important role in implementation of the portfolio management decision. As the sole purpose of active management is to generate excess returns over the benchmark, it is important that an equity benchmark representing this asset class be efficient, so that any outperformance of an active manager can be considered an outcome of the manager's skill. A more efficient benchmark for large-cap equity results in a historical average information ratio of zero for the universe of active managers. The key to generating alpha in this asset class then depends on one's ability to identify skillful managers.