Advanced Benchmarking Techniques for Portfolio Performance Evaluation

As a portfolio manager for a wealthy individual, you are tasked with evaluating the performance of a diversified portfolio that was constructed with a risk target aligned with the client's investment objectives. The portfolio consists of various asset classes, including equities, fixed income, and alternative investments.

Your client has expressed concerns about the performance of their portfolio, particularly in relation to the benchmarks you're currently using. The client's goals include not only absolute return but also alpha generation relative to a custom benchmark that reflects their specific risk profile and investment preferences.

Discuss the considerations and methodologies you would apply to evaluate the performance of the portfolio against the established benchmarks. In your answer, detail the importance of constructing appropriate benchmarks, how to address the benchmark's characteristics relative to the portfolio, and the implications of active versus passive management in this context.