# M^2 (p58 v6 CFA)

Can anyone put M^2 into plain english? I get Treynor, Jensens, and Sharpe - but what is M^2 vs Sharpe? M^2 = Rf + Shapre (avg for asset) x std dev of market

M^2 = Rf + std Market * SR Asset

isnt it comparing your portfolio to investing in the mkt portfolio?

M^2 compares the risk adjusted portfolio returns to the market return…beyond that, i just memorized the formula cuz i figure the formula will come up but unlikely an agree disagree q.

comp_sci_kid, check your formula.

thanks Tanya, i fixed it

How do you edit your posts??

i clicked edit and edited it :-/

for about 5 mins after you posted, you have “edit” menu bellow your post, where you have “Reply to This Message”, after short amount of time, you can no longer edit

Im guessing a question will be along the lines of one of the following: (1) What is the difference between M^2 and Sharpe (2) What is the difference between M^2/Sharpe vs Trenor/Jensen (3) What type of performance measure do Trenor and Jensen provide? (4) What type of performance measure do M^2 and Sharp provide? (5) T/F - Treynor, Jensen, Sharpe and M^2 should all produce the same result/answer - example - a manager is or is not skillfull. (6) If different answers, How could Treynor/Jensen’s Alpha provide a different answer than M^2/Sharpes. Any other thoughts?

Data_Monkey Wrote: ------------------------------------------------------- > Im guessing a question will be along the lines of > one of the following: > > (1) What is the difference between M^2 and Sharpe Sharpe doesnt take into account Market volatility (std) > > (2) What is the difference between M^2/Sharpe vs > Trenor/Jensen Trenor/Jensen only account for Systematic Risk M^2 Sharpe for total risk > (3) What type of performance measure do Trenor and > Jensen provide? Excess Return to Systematic Risk Ratio > (4) What type of performance measure do M^2 and > Sharp provide? Excess Return to Total Risk > (5) T/F - Treynor, Jensen, Sharpe and M^2 should > all produce the same result/answer - example - a > manager is or is not skillfull. > (6) If different answers, How could > Treynor/Jensen’s Alpha provide a different answer > than M^2/Sharpes. > > > Any other thoughts?

> (5) T/F - Treynor, Jensen, Sharpe and M^2 should > all produce the same result/answer - example - a > manager is or is not skillfull. A: FALSE > (6) If different answers, How could > Treynor/Jensen’s Alpha provide a different answer > than M^2/Sharpes. A: IF A MANAGER TAKES ON AN EXCESSIVE AMOUNT OF NON-SYSTEMATIC RISK , THEN TREYNOR/JENSEN WILL NOT BE ABLE TO CAPTURE IT - SHARPE / M^2 WILL CAPTURE IT (PROVIDE A LOWER RATIO) - TREYNOR/JENSEN MAY BOTH SAY THE MANAGER IS SKILLED WHILE SHARPE/M^2 MAY NOT

m^2 is the excess return of your portfolio if it had the same risk (volatility) as the market.

^Yes.