CFA Practice Question

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CFA Practice Question

Which statement is true regarding M-squared?

A. It should give us portfolio rankings that are identical to those of the Sharpe ratio.
B. A portfolio with a M-squared of 0.5 underperforms the market.
Correct Answer: A

This is because both measures use total risk.

B is false: if the measure is positive, that means the portfolio outperforms the market.

M-squared adjusts an investment's risk level to match that of a benchmark, such as the S&P 500. How? To reduce the standard deviation of a volatile technology fund, for example, the Modiglianis' computer adds risk-free Treasury bills to the portfolio until it matches the S&P 500. When adjusted for risk, some top performers may not look that decidedly attractive.

User Contributed Comments 1

User Comment
khalifa92 M^2 = adjusted portfolio returns to market risk - market return
= positive (negative) outperform (underperform).
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