By Numer de Guia, CFA Are you getting properly compensated for the amount of risk you take on in owning stocks? One way to measure that is by tracking a stock's risk-adjusted return -- its average return over a given period divided by its volatility, or risk, commonly measured in terms of
standard deviation of returns.
Risk-adjusted return provides a fairer comparison of investment performance than absolute return alone since it takes into account the uncertainty of an asset's potential for profits or loss.
MINING FOR GOLD. This week, we decided to mine our database for stocks with the most attractive risk-adjusted returns. As with any statistical computation, the number of observations should be large enough to increase the precision of the analysis. So in this instance we used the monthly returns for the past five years. We used the average annual return in the numerator, and the annual standard deviation in the denominator (which is the monthly standard deviation multiplied by the square root of 12).
From the list of stocks with the highest risk-adjusted returns, we then sifted for those issues ranked 4 STARS (buy) or 5 STARS (strong buy) by S&P equity analysts. Stocks with those rankings are expected to outperform the overall market over the next 6 to 12 months.
When we ran the numbers, these 30 names emerged:
S&P STARS Rank
Acadia Realty Trust
Alexandria Real Estate Equities
Annaly Mortage Management
Capital Automotive REIT
CBL & Associates Properties
Coventry Health Care
Developers Diversified Realty
Dun & Bradstreet
General Growth Properties
Mccormick & Co
Pan Pacific Retail
Sovran Self Storage
St Jude Medical
De Guia is an analyst for Standard & Poor's Portfolio Advisors