Benchmarks serve multiple purposes in financial markets and hence play a critical role. They serve as a reference point for pricing instruments, reflect the opportunity cost and also serve as a reference rate for the relative performance of a portfolio. Hence, a benchmark that is transparent, liquid, easy to calculate and non-manipulative is considered critical for the efficiency of financial markets. In this paper, we suggest a model proposed, by Mirakhor (1996) which can well serve the purpose of a potential benchmark for pricing. We also show the feasibility of the model in contemporary financial system. The main motivations behind the paper are, a) to move away from any fixed rate of return, b) to present a benchmark that reflects the return based on real sector of an economy as far as possible and, c) to present a non-manipulative benchmark.
