Assume you wish to evaluate the performance of a portfolio that had a 14 percent average return for a period of time, with a standard deviation of 23 percent. The market for the same period had an average return of 10.5 percent, with a standard deviation of 20 percent. The average risk‐free rate was 5 percent:

The portfolio had better risk‐adjusted performance than the market, 12.83 percent versus 10.5 percent.

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M2 = RF + OM / Op X (Rp - RF) = 5+20/23x9 = 12.83%