A friend announces a plan to benchmark the performance of his small-cap stocks with the S&P 500. Which of the following concerns should dominate your thoughts?
A. The risk and return of small-cap stocks and the S&P 500 aren’t matched. The comparison is inappropriate.
B. Problems with small-cap benchmarking were recently revealed. Russell 2000 index elements frequently change.
C. This investor is serious about managing his portfolio, and he’s on the right track, though you have suggestions for fine-tuning his approach.
D. The investor’s portfolio is too heavily weighted in small-cap stocks. This problem is an allocation error driven by demand for excess returns.