What is an advantage of returns-based benchmarks?

Returns-based benchmarks offer the advantage of generally satisfying benchmark validity criteria because they are constructed based on actual performance data over a defined time period. This approach allows for comparison against a broader market or specific sectors with similar risk and return profiles. By utilizing historical returns, these benchmarks can reflect the investment strategy's effectiveness and align closely with the investor's objectives.

Additionally, these benchmarks allow for a clearer assessment of a manager's performance, as they can be evaluated based on quantitative metrics, such as the Sharpe ratio or alpha. The focus on returns makes it easier to measure how well a portfolio has performed compared to a relevant market index, providing valuable insights to investors seeking to gauge the relative success of their investment approach.

The other aspects associated with this method, such as the need for extensive research or complexity in usage, do not pertain to the primary benefits of returns-based benchmarks, which aim to provide clarity and relevance in performance assessments. Similarly, while quantitative analysis can be a primary focus, returns-based benchmarks are not exclusively utilized for this purpose, as they can also accommodate qualitative aspects when relevant.