To calculate the M-squared ratio for Cumulus, use the following formula:

We would compare the 13.51% to the return on the market of 12% and conclude that the Cumulus Fund has superior performance. Using the same formula as above, the M-squared measure for the Saturn fund is 14.65%, which indicates that the Saturn fund has superior performance relative to both the market and Cumulus fund.

The Treynor ratio for Cumulus would be calculated as:

The Treynor ratio for the Saturn fund is 10.6, which indicates that the Cumulus fund has superior performance relative to the Saturn fund.

The discrepancy between the two measures is because the M-squared measure uses the standard deviation (total risk) as the measure of risk whereas the Treynor ratio uses beta (systematic risk). The Cumulus fund is poorly diversified relative to the Saturn fund. When unsystematic risk is captured in the M-squared measure, the Cumulus fund is not as attractive as the Saturn fund.