Modigliani risk-adjusted performance

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Modigliani risk-adjusted performance (also known as M², M2, Modigliani–Modigliani measure or RAP) is a measure of the risk-adjusted returns of some investment portfolio. It measures the returns of the portfolio, adjusted for the risk of the portfolio relative to that of some benchmark (e.g., the market). We can interpret the measure as the difference between the scaled excess return of our portfolio P and that of the market, where the scaled portfolio has the same volatility as the market. It is derived from the widely used Sharpe ratio, but it has the significant advantage of being in units of percent return (as opposed to the Sharpe ratio – an abstract, dimensionless ratio of limited utility to most investors), which makes it dramatically more intuitive to interpret.