Least Likely Correct Statement about Benchmarking Indexes for Endowment Fund Performance

Explanation

Let's analyze each statement and determine which one is least likely correct:

A. The creation of an investment bond index is difficult because of bond pricing issues, and because the universe of bonds is constantly changing. This statement is likely to be correct. Creating an investment bond index can be challenging due to several factors. First, bond pricing can be complex, especially considering the variety of bond types and the different ways they are valued. The pricing of bonds involves considering factors such as coupon rates, yields, maturities, and credit ratings. This complexity can make it difficult to construct an accurate and representative bond index.

Additionally, the universe of bonds is constantly changing. New bonds are issued, existing bonds mature, and issuers may alter their debt structures. This dynamic nature of the bond market requires frequent updates to the composition of a bond index to reflect the current market conditions accurately. Therefore, it is reasonable to expect that the creation of an investment bond index can be challenging due to the complexity of bond pricing and the ever-changing bond universe.

B. Correlations between bond index returns for different countries have tended to be lower than correlations between different bond indexes within a single country. This statement is likely to be correct. Historically, correlations between bond index returns for different countries have tended to be lower than correlations between different bond indexes within a single country. This is because bond markets in different countries can be influenced by various factors such as economic conditions, monetary policies, and political events that may not affect all countries simultaneously. As a result, the performance of bond markets in different countries may exhibit lower correlations with each other.

On the other hand, within a single country, bonds may be subject to similar economic and market factors, resulting in higher correlations between different bond indexes. Therefore, it is reasonable to expect that correlations between bond index returns for different countries are generally lower than correlations between different bond indexes within a single country.

C. Sovereign bond indexes outside the United States represent after-tax returns. This statement is least likely to be correct. Sovereign bond indexes outside the United States typically represent pre-tax returns rather than after-tax returns. Sovereign bond indexes track the performance of government-issued bonds in various countries. These indexes provide a benchmark for investors to assess the performance of their bond investments relative to a specific market or country.

The returns generated by sovereign bond indexes generally reflect the pre-tax performance of the underlying bonds, meaning they do not account for taxes. Taxes can significantly impact investment returns, and it is common for investors to consider after-tax returns when evaluating investment performance. Therefore, it is unlikely that sovereign bond indexes outside the United States represent after-tax returns.

Based on the analysis, the least likely correct statement is:

C. Sovereign bond indexes outside the United States represent after-tax returns.