's price variation on a one-month basis — so-called realized volatility — is currently near 28, which is above its long-term average of 13.
The investing implication of these trends is that equity investors are poised to get less bang for their buck after returns are adjusted for the risks taken. Goldman Sachs has preemptively updated its strategy that targets stocks with the highest risk-adjusted returns, based on a gauge known as the Sharpe ratio. The strategists led by Kostin calculated it by dividing the consensus 12-month price target among analysts with the six-month volatility implied by options traders. A higher ratio indicates a more attractive return relative to risk-taking and the prevailing level of volatility.
Kostin noted that the High Sharpe Ratio basket has underperformed the S&P 500 this year by six percentage points largely because it held a large number of value stocks.
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