M² Measure 76M² measure takes the opportunity to lever into account! Given that we can borrow at the risk-free rate we can lever a position in A to attain a position at A’. A’ has the same beta as the market but it has a higher expected rate of return.
The fund with the higher M² measure is considered to be better than the fund with a lower M² measure.
M² measure is sensitive to the magnitude of the excess return captured by the manager.
M² measure is sensitive to the number of different securities for which a manager captured excess returns.
Single-period random cash flows:
CAPM - Performance measurement