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Goldman’s Sharpe ratio stock portfolio typically beats the market. Here’s what’s in it

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The Netflix logo is seen on their office in Hollywood, Los Angeles, California, July 16, 2018.

Lucy Nicholson | Reuters

Goldman Sachs highlighted on Monday stocks with the best risk-adjusted returns in a semiannual update of its high Sharpe ratio basket.

Portfolio managers widely use the Sharpe ratio to measure a security’s return above and beyond the risk-free rate, adjusted for the risk of holding it. In this case, Goldman calculates it as a stock’s return to the consensus Goldman analyst 12-month price target divided by its six-month option-implied volatility. The basket includes the 50 stocks with the highest prospective Sharpe ratio.

As concerns about inflation continue ahead of the Federal Reserve’s upcoming policy meeting, investors may be interested in risk-conscious names like those on Goldman’s high Sharpe ratio list.

“Inflation is the most proximate risk,” Goldman Sachs’ David Kostin said in the note. “Our volatility strategists posit that inflation surprises could continue to result in larger-than-usual moves in the [CBOE Volatility Index], especially as economic growth slows and returns to normal.”

Goldman Sachs’ high Sharpe ratio basket historically beats the market since its inception. The group of stocks typically outperforms the market 64% of the time each 6-month period, with an average return above the benchmark of 2.63 percentage points. On an annualized basis, the portfolio is beating the S&P 500 on average by 5.3 percentage points.

However, the investment bank notes that the average stock on the updated list is flat in 2021. Still, Goldman Sachs said the median name is projected to see nearly triple the return of the average S&P 500 stock over the next 12 months, given the same level of implied volatility.

The high Sharpe ratio basket typically skews toward value stocks. However, several mega-cap growth names like Netflix, Amazon and Apple made the cut in the firm’s latest portfolio rebalance as those shares have lagged recently, but sport strong return prospects and low expectations for volatility.

Here are 10 of Goldman Sachs’ names with high risk-adjusted returns:

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