Calculate M Squared

M Squared Formula:

\[ M^2 = (R_p - R_f) \times \left(\frac{\sigma_m}{\sigma_p}\right) + R_f \]

Portfolio Return (Rp):

Risk-Free Rate (Rf):

Market Standard Deviation (σm):

Portfolio Standard Deviation (σp):

M Squared (M²):

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1. What is M Squared?

M Squared (M²) is a measure of risk-adjusted return that compares a portfolio's performance to a benchmark after adjusting for risk. It indicates what the portfolio would have returned if it had the same risk as the market index.

2. How Does the Calculator Work?

The calculator uses the M Squared formula:

\[ M^2 = (R_p - R_f) \times \left(\frac{\sigma_m}{\sigma_p}\right) + R_f \]

Where:

\( R_p \) — Portfolio return (%)
\( R_f \) — Risk-free rate (%)
\( \sigma_m \) — Market standard deviation (%)
\( \sigma_p \) — Portfolio standard deviation (%)

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

3. Importance of M Squared

Details: M Squared allows comparison of different portfolios' performance on a risk-adjusted basis. A higher M² indicates better risk-adjusted performance compared to the market.

4. Using the Calculator

Tips: Enter all values as percentages. Portfolio standard deviation must be greater than zero. The result shows what your portfolio would have returned if it had the same risk as the market.

5. Frequently Asked Questions (FAQ)

Q1: How is M Squared different from Sharpe ratio?
A: While both measure risk-adjusted returns, M Squared expresses the result in percentage terms, making it more intuitive for comparison with actual returns.

Q2: What is a good M Squared value?
A: An M² higher than the market return indicates superior risk-adjusted performance. Equal to market means performance matched the market after risk adjustment.

Q3: When should I use M Squared?
A: Use it when comparing portfolios with different risk levels or when evaluating if a portfolio's higher returns adequately compensate for its higher risk.

Q4: What are limitations of M Squared?
A: It assumes normal distribution of returns and that standard deviation fully captures risk. It may not account for all risk factors in complex portfolios.

Q5: How often should M Squared be calculated?
A: Calculate it periodically (monthly/quarterly) to track risk-adjusted performance over time, especially when comparing multiple investment options.