The M2 measure adjusts the portfolio return for total risk and is calculated as follows:

$M2 = (SR \times \sigma_m) + R_f$

where:

• $SR$ is the Sharpe ratio (0.8),
• $\sigma_m$ is the market standard deviation of returns (12%),
• $R_f$ is the risk-free rate (2%).

Substituting the values:

$M2 = (0.8 \times 0.12) + 0.02 = 0.116 \text{ or } 11.6\%$

The M2 alpha is the difference between the M2 measure and the market return:

$M2 \text{ alpha } = M2 - R_m = 0.116 - 0.08 = 0.036 \text{ or } 3.6\%$

Thus, the correct answer is A (3.6%).