1. What is the Modigliani M2 Measure?

Definition: The Modigliani risk-adjusted performance measure (M2) evaluates a portfolio's return adjusted for its risk relative to a benchmark.

Purpose: It helps investors compare different portfolios by showing what return a portfolio would have achieved if it had the same risk as the benchmark.

2. How Does the M2 Calculation Work?

The calculator uses the formula:

Where:

• \( M2 \) — Modigliani risk-adjusted return (%)
• \( Rf \) — Risk-free rate (%)
• \( Rp \) — Portfolio return (%)
• \( \sigma b \) — Benchmark standard deviation (%)
• \( \sigma p \) — Portfolio standard deviation (%)

Explanation: The formula adjusts the portfolio's excess return (over risk-free rate) by the ratio of benchmark risk to portfolio risk, then adds back the risk-free rate.

3. Importance of M2 in Portfolio Evaluation

Details: M2 allows direct comparison of portfolios with different risk levels by showing what they would return if adjusted to the same risk level as the benchmark.

4. Using the Calculator

Tips: Enter the risk-free rate, portfolio return, benchmark standard deviation, and portfolio standard deviation. All values must be percentages. Portfolio standard deviation must be > 0.

5. Frequently Asked Questions (FAQ)

Q1: What's a good M2 value?
A: An M2 higher than the benchmark return indicates superior risk-adjusted performance. Higher values are better.

Q2: How is M2 different from Sharpe ratio?
A: While both measure risk-adjusted returns, M2 expresses the result in percentage terms, making it more intuitive to interpret.

Q3: What time period should I use for inputs?
A: Use consistent time periods (e.g., annual returns with annual standard deviations) for all inputs.

Q4: Can M2 be negative?
A: Yes, if the portfolio's risk-adjusted performance is poor enough, M2 can be negative.

Q5: What's a typical risk-free rate to use?
A: Common proxies include 3-month Treasury bill rates or 10-year government bond yields, depending on investment horizon.