M-squared Measure (help with conceptualizing)

CFA Level III
#1

Hi- I’m trying to memorize this formula, and know that it compares return to CML, but can anyone break it down further or explain it in another way? I hate to rely solely on memorization for such a simple formula. Thanks

#2

brother bilo Wrote: ------------------------------------------------------- > Hi- I’m trying to memorize this formula, and know > that it compares return to CML, but can anyone > break it down further or explain it in another > way? I hate to rely solely on memorization for > such a simple formula. > > Thanks sure its easy, M2 = Risk free rate + Sharpe of the porfolio x market std. deviation

#3

PS - all formulas with standard deviation are CML since they capture systematic and unsystematic risk. Formulas with beta are for systematic risk only (hence measured portfolios require highly diversified securities so the unsystematic risk is minimized to use the measure).

#4

isn’t it just Rf + Sharpe * Market StDev? or (StDEv of Portfolio / StDev of Market) takes the place of Beta in CAPM.

#5

spoke too soon- to rephrase- M2 looks a lot like CAPM. CAPM = Rf + (Beta)(Rm-Rf) M2 = Rf + (StDevp/Stdevm)(Rportfolio - Rf)

#6

it’s the return you would get if the porfolio had the same total risk at the market portfolio.