M-Squared (M2) and M-Squared Alpha

A portfolio manager reviews all available portfolio evaluation methodologies and decides to evaluate portfolios based on the methodology that includes market risk only. The measure that _best describes_ evaluation based only on market risk is:

Incorrect. _M_-squared, also known as the Modigliani-Modigliani measure, determines the return that a portfolio would have received if it had the same risk as the comparable market index. The formula utilizes a ratio of the portfolio and market standard deviations, which include market risk as well as unsystematic risk. $$\displaystyle M^2 = \left[ E(R_P) - R_f \right] \frac{\sigma_m}{\sigma_P} + R_f $$

Correct. Jensen's alpha measures the average return on a portfolio above what is anticipated by using the capital asset pricing model. The formula for the model incorporates beta, or market risk, only.

Incorrect. Sharpe's measure is a ratio of a portfolio's risk premium to the portfolio's total risk. This incorporates both market and unsystematic risk.

_M_-squared.

Jensen's alpha.

the Sharpe ratio.