Updated April 30, 2021 by Bob Ciura
Most investors aim to either:
- Maximize the return on a set risk
- Minimize the risk with particularly high returns
Perhaps the best metric for analyzing both risks and Return is the Sharpe ratio. With this in mind, we’ve compiled a list of the 100 stocks in the S&P 500 Index with the highest Sharpe ratios.
You can download your free list (along with relevant financial metrics like dividend yields and value for money) by clicking the link below:
The list of the 100 stocks in the S&P 500, sorted by Sharpe Ratio, available for download above, includes the following metrics for each stock:
- Sharpe ratio
- Payout Rate
- Dividend yield
- One year return
- Market capitalization
- One year standard deviation
- Price-earnings ratio
Read on to learn more about using the Sharpe Ratio to analyze publicly traded stocks.
How to Use the Sharpe Ratios List to Find Compelling Investment Ideas
An Excel document with the 100 highest Sharpe ratios in the S&P 500 can be extremely useful.
The resource becomes even more powerful when it is combined with rudimentary knowledge of using Microsoft Excel’s filter function to find investment ideas.
With that in mind, this section will show you step by step how to implement a specific investment screen using the Sharpe Ratio stock listing. Specifically, we’ll show you how to look for stocks with a Sharpe Ratio above 1 and a P / E ratio below 15.
Step 1: Download the Sharpe Ratio Stocks List by clicking here.
Step 2: Click the filter icon at the top of the Sharpe Ratio column (see below).
Step 3: Change the filter setting to Greater Than Or Equal To, enter 1, and click OK. This filters for S&P 500 stocks with Sharpe ratios greater than or equal to 1.
Step 4: Close the filter window (by clicking the “Exit” button). Not by clicking the “Clear Filters” button in the lower right corner). Then click the filter icon at the top of the Forward P / E Ratio column (see below).
Step 5: Change the filter setting to Less Than Or Equal To, enter 15, and click OK. This filters for S&P 500 stocks with a forward P / E ratio less than or equal to 15.
The remaining stocks in this Excel document are S&P 500 stocks with a Sharpe ratio greater than 1 and a price / earnings ratio less than 15.
You now have a solid basic understanding of how to use the Sharpe Ratios List to find investment ideas.
The remainder of this article provides more information on how to analyze stocks using the Sharpe Ratio.
What is the Sharpe Ratio?
The Sharpe ratio is the most popular measure of risk-adjusted return in the financial industry. It tells investors whether they are being adequately rewarded for the risks they take in their investments.
The Sharpe ratio is calculated using the following formula:
The Sharpe ratio calculation consists of three components:
- Return on investment
- Risk-free return
- Investment standard deviation
Investment return and investment standard deviation are relatively simple and do not require any explanation.
The risk-free rate of return may vary depending on the use case. For most investors, the current 10-year US Treasury bond yield is an appropriate risk-free rate of return.
For this article, we used a risk-free rate of 0 because interest rates have come down significantly.
In practice, the Sharpe ratio is rarely calculated by hand. Instead, investors generally use a tool such as Microsoft Excel to calculate the Sharpe ratio.
Manually Calculating Sharpe Ratios Using Yahoo! Finances
At Sure Dividend, we use YCharts for much of our data analysis. YCharts requires a paid subscription, which many of our readers don’t have. Accordingly, we would like to show you how you can manually calculate the Sharpe ratio for publicly traded stocks over a certain period of time.
Specifically, this tutorial will teach you how to calculate a 3 year Sharpe ratio for Apple, Inc (AAPL).
Step 1: Navigate to Yahoo! Finances. Enter the ticker of your desired stock in the search bar at the top of the Yahoo! Finance bar. In our case, it’s Apple.
Step 2: Click on historical data as shown below.
Step 3: Change the data in the area of your choice and then click on “Apply”. Then click on “Download” (just below the “Apply” button).
Step 4: The Excel document downloaded as a result of your previous process has six columns: Open, High, Low, Close, Customized Close (or “Customize Close” on the top row of the table), and Volume. It is adjusted close that we are interested in as this takes into account stock splits and dividend payments.
Using the adjusted closing column, calculate the stock’s annualized returns over the period under study. In the example shown below, this is done by dividing the current price by the oldest price and then increasing it to the inverse power of the number of years during the sample. The equation is shown below.
Step 5: Next, a time series of the daily returns needs to be calculated. This is done in column I in the table shown below.
Step 6: Calculate the standard deviation of daily price returns using the STDEV.P () function and convert that number to an annualized number by multiplying it by the square root of 252. We’re using 252 instead of 365 (the number of days in a year). because there are approximately 252 trading days in an average calendar year. The formula for calculating the annualized standard deviation is shown below.
Step 7: Use the annualized return and annualized standard deviation data to compute a Sharpe ratio. An example of this is shown below, using 0% as the risk-free rate of return.
The resulting number is the Sharpe ratio of the investment in question. In this case, Apple had a 3 year Sharpe ratio of 1.38 at the time of this writing.
Finding stocks with strong historical Sharpe quotas is a useful way to find investment ideas.
Even so, this strategy is not that just Way to find high quality investments. To conclude this article, we provide additional resources that you can use for your investment due diligence.
If you are looking for high quality dividend growth stocks suitable for long term investing, the following databases will help:
You may also be looking for attractive stocks from a specific stock market to ensure adequate diversification within your portfolio. In this case, the following resources are helpful:
You may also want to consider investing within the major market indices. Our downloadable lists of US large and small cap stocks are shown below:
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