What is a disadvantage of returns-based style analysis?

Returns-based style analysis is a quantitative method used to assess the investment style of a portfolio manager by analyzing the returns of the portfolio relative to various benchmark indexes. While it has many benefits, a significant disadvantage is its potential ineffectiveness in characterizing a manager's current style.

This lack of effectiveness can arise because returns-based style analysis typically relies on historical return data to infer style characteristics. If a portfolio manager has recently altered their investment strategy or approach without a corresponding change in returns that reflect their new style, this method may fail to capture that shift. As a result, the analysis can lag in providing an accurate representation of a manager's current investment strategy, leading to misinterpretation of how the manager might perform under different market conditions.

In contrast, the other options do not accurately represent the limitations associated with returns-based style analysis. For instance, it does require a certain level of return data but is not considered minimal or trivial. Similarly, while it can be a useful tool in some aspects of performance evaluation, it does not inherently provide an accurate depiction of manager skill as it focuses primarily on returns rather than the underlying decision-making processes. Lastly, the ability to quickly adapt to changes is not necessarily a characteristic of returns-based style analysis; rather, it