What is the primary purpose of performance measurement in investments?

The primary purpose of performance measurement in investments is to establish investment objectives and formulate a portfolio strategy. This function is essential because it enables investors to assess whether their investment strategies are aligned with their financial goals and risk tolerance. Performance measurement provides insights into how well an investment portfolio is achieving its intended objectives, including returns and risk management.

By evaluating past performance against specific benchmarks, investors can make informed decisions about adjustments needed in their portfolio strategy to enhance future performance. This process not only involves analyzing returns but also scrutinizing the risk taken to achieve those returns, thereby continuously refining the investment approach based on empirical evidence.

In contrast to other options, measuring performance goes beyond merely assessing the abilities of investment managers or minimizing costs. It does not focus on predicting future market trends, as performance measurement is predominantly retrospective, analyzing what has already occurred to improve strategy and decision-making moving forward. This comprehensive understanding allows investors to set realistic objectives based on their financial needs and market conditions.