M^2 is defined as what?

M^2, or Modigliani-Modigliani measure, is a performance metric used to assess the risk-adjusted return of investment portfolios, particularly in the context of comparing a portfolio to a market index. It provides a way to express the return of a portfolio if it were adjusted to have the same level of risk as a benchmark, usually a market portfolio.

The correct definition focuses on M^2 reflecting the mean incremental return a portfolio generates over a market index, considering the risk taken by the portfolio relative to that market index. This performance measure translates the portfolio's excess return into a form that can be easily interpreted and compared against the market.

In this context, the measure captures how well the portfolio has performed beyond what could be expected based on its risk profile when compared directly to the market index. It essentially provides insights into both the performance and the risk of the portfolio relative to the benchmark, making it a valuable tool for investors seeking to understand relative investment performance.