What happens to alpha analysis if the benchmark is invalid?

Be careful. Alpha is measured relative to a benchmark or risk model. If the benchmark is invalid, positive alpha may not mean manager skill. It may mean the benchmark was too easy, too risky, too conservative, or unrelated to the actual mandate.

Suppose a low-volatility equity manager earns 7.2% while a high-beta growth benchmark earns 5.8% during a defensive market. The 1.4% excess return does not automatically prove skill because the benchmark may not reflect the strategy's risk profile.

In an exam answer, first state that the benchmark is not valid. Then explain why performance metrics based on that benchmark are unreliable until a more appropriate benchmark is selected.