Style/Risk-Adjusted Performance

Abstract

The M-squared risk-adjusted performance measure, developed by Leah Modigliani and Franco Modigliani, calibrates all similar funds against the same broad market index; this is a desirable property. There may be times, however, when a “style mandate” may place to a fund at a distinct advantage (or disadvantage) relative to other funds. In such cases, the author shows that the M-squared methodology can be combined with Sharpe style analysis to produce a “style/risk-adjusted performance” measure. This measure is more difficult to calculate, but when there are strong style effects it can provide a useful additional perspective on performance.