A Jigsaw Puzzle of Basic Risk-adjusted Performance Measures

In 1997, Modigliani and Modigliani developed the risk-adjusted performance measure RAP (often called Msquared),which is now widely accepted in theory and practice. Their measure has further increased investorawareness of risk-adjusted performance measurement. However, this measure uses the standard deviation as therelevant measure of risk, and, therefore, is relevant only to investors who invest their entire savings into a singlefund. In this article the authors present a jigsaw puzzle of basic risk-adjusted performance measures, which helpsto better understand the key links between these measures. In doing so they include a hardly known measure: themarket risk-adjusted performance (MRAP). While closely related to the Modigliani measure, the MRAP measuresreturns relative to market risk instead of total risk. Thus, the MRAP is suitable for investors who invest in manydifferent assets.