What does M^2 measure in relation to portfolio performance?

M², or Modigliani-Modigliani measure, is a risk-adjusted performance metric that quantifies the excess return of a portfolio relative to a benchmark, but crucially it does so by adjusting for the total risk taken, measured in terms of standard deviation. It essentially takes the return of a portfolio and adjusts it to match the risk profile of a market index, allowing for a straightforward comparison between the portfolio's performance and that of the benchmark.

By aligning the risk profile of the portfolio with that of a chosen market index, M² offers investors insight into how much value has been added (or lost) given the level of risk assumed. This characteristic distinguishes it from simple return measures and provides a clearer perspective on performance related to risk undertaken, making it particularly useful for assessing whether a portfolio manager is generating returns that justify the level of risk taken.

In contrast, other options do not fully encompass the essence of M². While measuring performance relative to historical averages, projecting future performance based on past trends, or analyzing risk-adjusted returns of individual securities are valuable concepts, they do not capture the specific adjustment for total risk that M² accomplishes in relation to a benchmark index.