Business and Personal Finance Dictionary

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• M-SQUARED
  
  A way of measuring the performance of an investment portfolio, namely the average rate of return on a portfolio that (a) consists of investment in T-bills and the investment portfolio and (b) has the same standard deviation as the relevant benchmark portfolio. Thus, if an investment portfolio’s M-squared is greater (less) than the return on the benchmark portfolio, then the investment portfolio’s risk-adjusted return is better (worse) than that of the benchmark. (Noelle Knox, "Slice, Dice and Scrutinize: Risk Measurements Draw a Crowd," NYT, 4/5/98, p. 45.) A portfolio of two options with the same underlying risk factor and expiration date: a long call with a higher strike and a short put with a lower strike. An investor with long (short) exposure to the underlying factor can go short (long) a collar, retaining exposure to the factor within a range, while limiting downside exposure at the cost of upside potential.
  
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