In a returns-based benchmark, how are the weights on the indexes characterized?

In a returns-based benchmark, the weights assigned to the various indexes are indeed characterized as non-negative and must sum to one. This structure is essential for accurately representing the composite benchmark. Non-negative weights ensure that each component index contributes positively towards the overall benchmark return, reflecting a realistic investment scenario where positions are not shorted.

The requirement that the weights sum to one allows for a normalized comparison across different asset classes or indices, providing a clear and standardized assessment of performance that can be matched against the actual performance of a portfolio. This adheres to the principles of modern portfolio theory, where a benchmark requires a cohesive representation of the investment universe in which the portfolio operates. Adopting this method facilitates investors in understanding how their portfolio aligns with the intended market exposure and performance expectations.

The other options do not accurately describe the characteristics of weights in returns-based benchmarks. For instance, negative weights would imply that an index could be shorted, which is typically not applicable in constructing a benchmark. While certain benchmarking methods may consider historical performance, returns-based benchmarks do not solely rely on that; they are constructed to capture current market conditions and expected returns. Lastly, while the performance of sectors can influence the return of an index, it does not directly dictate how weights