M^2 measure (from Modigliani and Modigliani)

[johntavv]

The text says:
Measures like M2 that use a benchmark are also subject to the criticism the benchmark used may not be precisely replicable.
The formula for M2 is: risk-free return + [(portfolio return - risk-free) / portfolio S.D] x S.D market.
Where in that formula is the benchmark?

 

[pineapple]

i think the fact that they include S.D of the market. This would be the only place i can see. I guess rf rate could be an benchmark to an extent too?

 

[Unemployed]

I think the issue here is to set a specific number for this measurement as a benchmark. Like, 15%. It is not an investable alternative because it is not known what the SD of the market in advance nor a straight forward what to invest so you would know that you be able to generate 15% in M^2

 

[JSobes]

pineapple wrote:
i think the fact that they include S.D of the market. This would be the only place i can see. I guess rf rate could be an benchmark to an extent too?

There is nothing wrong with the Rf - it explicitly states in the curriculum that the market return is not always applicable. It is the std deviation of the market that is the critique here like you first said

 

[daharmattan1]

This is pretty obscure, but I believe that the benchmark they are referencing is actually whatever benchmark or market proxy is being used to calculate the average account return (so the Ra in schweser or Rp everywhere else). This would be calculated using the CAPM model, where the market return is generally a proxy like the S&P 500. Jsobes is right too in the sense that the standard deviation is based on this market benchmark as well.
So it’s the exact same criticism leveraged about jensen’s alpha and the treynor ratio–but there you just see the assumptions of the CAPM a little more explicitly in the formulas.