Performance Appraisal of Investment Managers

Hard Performance Evaluation Performance Appraisal

After evaluating several investment managers, a wealth management firm conducted a performance appraisal of its equity portfolio over the last three years. The portfolio generated a total return of 9% per annum while its benchmark, the S&P 500, achieved a return of 8% per annum. Additionally, the firm's analysis revealed that the portfolio had a beta of 1.2 and a standard deviation of returns of 15%. The management team is now considering whether to retain the manager based on this performance.

In assessing the performance of the investment manager, which of the following measures would provide the most comprehensive evaluation of the investment manager's ability to deliver risk-adjusted returns?

Alpha, calculated as the difference between the portfolio return and the expected return based on the CAPM.

Sharpe Ratio, which measures the excess return per unit of total risk.

Information Ratio, which assesses active performance relative to a benchmark.

Hint

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