Did You Really Beat the Market? A Practical and Parsimonious Approach to Evaluating Risk-Adjusted Performance

Abstract

This study contributes to the literature by modifying and recasting the Modigliani and Modigliani M-Squared risk-adjusted performance measure in a practical setting. Specifically, rather than combine the risk-free asset (Treasury Bill) with the portfolio under consideration to match market risk, this study combines the risk-free asset with a levered (or unlevered) market ETF to match portfolio risk. In so doing, this study addresses the question: Could an investor have earned higher returns with the same risk (standard deviation) using a simple combination of the risk-free asset and a readily available levered (or unlevered) market ETF? The study also addresses the impact of the context where one captures return measurements on outperformance conclusions. Although this study focuses its analysis on in-sample descriptive statistics, the new Risk-Equivalent Excess Performance measure and contextualization provide a basis for future out-of-sample inferential analysis.