Question

A plan sponsor with a portfolio manager who invests in small capitalization, high-growthstocks should have the plan sponsor’s performance measured against which one of thefollowing?

a. S&P 500 Index.

b. Wilshire 5000 Index.

c. Dow Jones Industrial Average.

d. Russell 2000 Index.

Short answer

d. Russel 2000 Index

Step-by-step solution

Definition of Russel 2000 Index

The Russel 2000 Index, started by Frank Russel company is a small-cap stock market index that makes up the smallest 2000 stocks in the Russel 3000 stock.

Explanation on the performance measurement 

Since Russell 2000 comprises companies with a very small market capitalization value, comparing it with the plan sponsor that makes an investment in small capitalization will provide a justified comparison. As both belong to the same investment category, the Russell market index can be used as a benchmark. Hence, option d is the correct answer.

Explanation for incorrect options

a. S&P index comprises companies having a large capitalization value. So, comparing it with the plan sponsor’s performance is unjustified. Hence, option a is incorrect.

b. Wilshire 5000 index comprises a blend of large cap and small cap. As the plan sponsor indulges in investment in small cap, comparing them both will not be reasonable. So, option b is incorrect.

d. Dow Jones Industrial average will reflect the performance of blue-chip companies. So, the comparison would not be sensible as both carry investment in different types of companies. Hence option d is incorrect.