M-Squared and ranking issues for risky assets

Abstract

Adjusting returns for risk is essential and the methodology employed should be universally representative. M-Squared is an attempt to provide a risk-adjusted measure of performance, but it has two serious shortcomings: the absence of a benchmark return and the use of leverage. Analytical and empirical observations highlight these issues. Jensen’s alpha does not contain these problems.

Keywords:

• portfolio evaluation
• risk
• market efficiency
• asset pricing

JEL Classification:

• G00
• G11
• G14
• G12