I n portfolio performance evaluation, one compares the return obtained on a managed portfolio to the return expected on an unmanaged portfolio having the same risk. The benchmark is the expected return on the unmanaged portfolio. It should accurately reflect the risk associated with the managed portfolio during the evaluation period. However, since it is always difficult to measure the risk associated with a managed portfolio, there is always potential. for error in the benchmark. The purpose of this paper is to analyze benchmark error, and I do so in the context of the current widespread practice of using the capital asset pricing model (CAPM) to measure risk. As we shall see, performance evaluations based on the CAPM are prone to systematic errors of various kinds. Error in performance measurement can be ascribed to two sources. The first is random variation: The actual return is in part a function of unforeseeable events that cause parameter mis-estimation, events that tend to cancel each other's effects over repeated measurements. A second source of error is in the ex ante CAPM benchmark, an error that cannot be eliminated by repeated evaluations. Thus, ex ante benchmark errors are much more important than errors due to random causes; they make particular managers appear to outperform expectations when they fortuitously choose portfolios with negative errors in the benchmark, while managers unfortunate enough to choose portfolios with positive benchmark error will appear to do relatively poorly. We must remember that true portfolio management ability is not accurately indicated if the measured performance reflects the benchmark's