M2 Measure

It can be hard to interpret Sharpe Measure. If one

portfolio has a Sharpe ratio of 0.69 and another has a

Sharpe ratio of 0.73, what is the economic difference?
M2 helps make the Sharpe measure economically
intuitive:

Match volatility of the managed portfolio to that of the

index/portfolio which we are comparing to.
This can be done by creating a new imaginary portfolio, which
includes a positive/negative proportion of a risk free investment.
If the managed portfolio has higher volatility than index, a positive
proportion invested in the risk-free rate will reduce volatility.

M rP* rM
2