Evaluating Performance Appraisal Methodologies

ABC Wealth Management has consistently sought to enhance its portfolio performance evaluation process to provide better insights to its clients. The chief investment officer (CIO) has requested a detailed analysis of the firm’s performance appraisal methodologies, specifically focusing on the absolute and relative performance measures used in evaluating portfolio returns.

As a Portfolio Manager at ABC Wealth Management, you are tasked with detailing the following:

1. Explain the key differences between absolute and relative performance measures.
2. Evaluate how traditional performance metrics such as the Sharpe ratio, Treynor ratio, and Jensen’s Alpha contribute to these performance appraisals.
3. Provide recommendations for improving the performance evaluation process within the firm, considering the needs of both clients and risk factors associated with different investment strategies.

Your response should critically assess the benefits and limitations of the methodologies used, along with a discussion on how performance appraisal impacts client investment strategies.