For investors looking for ways to beat the market after a stellar year, Goldman Sachs is touting a portfolio of names that have the highest expected risk-adjusted returns. The bank is recommending its clients check out stocks with high Sharpe ratios, a measure of an asset’s performance relative to its volatility. The firm expects the median stock in its 50-name high Sharpe ratio basket to generate a 26% return over the next 12 months, or nearly four times the 7% anticipated return of the median S & P 500 constituent. “Our High Sharpe Ratio basket contains stocks offering the best risk-adjusted returns,” David Kostin, Goldman’s chief U.S. equity strategist, said in a Friday note to clients. “Our basket typically trades with a Value tilt as it often captures stocks that have experienced substantial price declines.” Goldman uses consensus 12-month price targets and options six-month implied volatility to measure Sharpe ratios. The 50-stock portfolio has posted a total return of 29%, in line with the S & P 500. But it has outperformed the equal-weighted S & P 500 by 10 percentage points this year. The basket also has a track record of beating the market, Goldman said. Since 1999, it has outpaced the equal-weight S & P 500 by 100 basis points and the regular market cap-weighted S & P 500 by 220 basis points. Google parent Alphabet as well as casino operators MGM Resorts and Caesars Entertainment are in the portfolio. Stocks in Goldman’s high Sharpe ratio basket also include consumer stocks Coca-Cola and Constellation Brands , as well as Devon Energy and Uber Technologies . — CNBC’s Michael Bloom contributed reporting.
Goldman predicts these names will have 4 times the return of the typical stock