Explain the term Modigliani–Modigliani measure

Question

Explain the term Modigliani–Modigliani measure.

Answer 1

Modigliani–Modigliani measure: This is also called M2 measure is a simple linear transformation of the Sharp ratio:

M2 = r + v × Sharpe

Here v is the standard deviation of returns of the relevant benchmark. It is easily interpreted as the return you would expect by your portfolio is this was deleveraged to have similar volatility like the benchmark.