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An investment benchmark is a standard against which the performance of an individual security or group of securities is measured.
For example, the average annual performance of a class of securities over time is a benchmark against which current performance of members of that class and the class itself is measured.
When the benchmark is an index tracking a specific segment of the market, the changing value of the index not only measures the strength or weakness of its segment but is the standard against which the performance of individual investments within the segment are measured.
For example, the Standard & Poor's 500 Index (S&P 500) and the Dow Jones Industrial Average (DJIA) are the most widely followed benchmarks, or indicators, of the US market for large-company stocks and the funds that invest in those stocks.
There are other indexes that serve as benchmarks for both broader and narrower segments of the US equities markets, of international markets, and of other types of investments such as bonds, mutual funds, and commodities.
Individual investors and financial professionals often gauge their market expectations and judge the performance of individual investments or market sectors against the appropriate benchmarks. In a somewhat different way, the changing yield on the 10-year US Treasury bond is considered a benchmark of investor attitudes.
For example, a lower yield is an indication that investors are putting money into bonds, driving up the price, possibly because they expect stock prices to drop. Conversely, a higher yield indicates investors are putting their money elsewhere.
Originally the term benchmark was a surveyor's mark indicating a specific height above sea level.
A permanent reference mark,usually set in concrete or iron and used to establish the elevation above sea level or certain corners in a surveying system. All other measurements in the area should be checked for accuracy relative to the nearest benchmark, preferably against several nearby benchmarks to establish redundancy.