Why is it generally not appropriate for an investor with a portfolio of domestic risk-free government bonds to benchmark against an investment-grade corporate bond index?

Benchmarking a portfolio of domestic risk-free government bonds against an investment-grade corporate bond index violates the compatibility criterion because these two types of investments possess fundamentally different risk profiles and return characteristics.

Domestic risk-free government bonds, such as U.S. Treasury securities, are considered to have minimal credit risk and are backed by the government, resulting in lower yields. In contrast, investment-grade corporate bonds carry a higher credit risk due to the potential for default by the issuing companies, leading to higher yields in compensation for this risk.

When selecting a benchmark, it is essential for the investor's portfolio and the benchmark to be aligned in terms of the underlying risk and return profiles. Using an investment-grade corporate bond index would not provide a fair or relevant comparison, as the performance outcomes would stem from different sources of risk and market behavior. Therefore, for the benchmark to be meaningful, it should reflect the same type of risk exposure that the investor holds in their portfolio of domestic risk-free government bonds.