Workshop Portfolio

<FOOLISH WORKSHOP>

Assessing Risk: The Sharpe Ratio      

By Jim Stevens (JimStevens@aol.com)

Burlington, VT (July 1, 1999) -- Risk is a term that we hear tossed around often in investment circles. Since risk isn't something that is easily quantified, it is often used to give subjective explanations (excuses?) for why one investment has performed differently than another.

How many times have you heard "But the risk-adjusted return was better" as a justification for low performance?

There are some elements of "risk" that will remain unquantifiable. No model can perfectly predict the future of stocks, and no investor can know exactly what their future financial situation will be or how they will react to changes in their lives or their investment performance.

Luckily, there are some factors that describe "risk" that we can measure. In 1966, William F. Sharpe introduced a formula for evaluating historical investments based on how well they performed compared to a benchmark investment, and how much volatility had to be endured to realize those returns. At The Sharpe Ratio website, you'll find all the deep academic details.

The Sharpe Ratio can be used to compare various investments' risk-adjusted performance. The higher the Sharpe ratio is, the greater an investment's return per unit of risk. The formula for calculating the Sharpe Ratio is to subtract a benchmark return (usually U.S. Treasury bills) from the investment's return for each year of the time period you are working with. Next you take the average of these yearly differences and divide the result by standard deviation of the differences. The higher the number, the better the risk-adjusted performance score.

As an example of the calculation, here are the returns for the Keystone 5 from 1986 through the end 1998:

Year     Key 5    T-bill   Difference   
1986     22.0%     6.2%     15.8%
1987      8.1%     5.5%      2.6%
1988      8.5%     6.4%      2.1%
1989     59.2%     8.4%     50.8%
1990     (0.3)%    7.8%     -8.1%
1991     71.8%     5.6%     66.2%
1992     12.4%     3.5%      8.9%
1993     36.3%     2.9%     33.4%
1994      9.0%     3.9%      5.1%
1995     43.8%     5.6%     38.2%
1996     38.2%     5.2%     33.0%
1997     56.6%     5.3%     51.3%
1998     45.3%     5.1%     40.2%

The average of the annual differences is 26.12%, and the standard deviation of the differences is 23.17%. Divide the average difference by the standard deviation of the differences and you get a Sharpe Ratio of 1.13. Over the same time period, the Sharpe Ratio for the Standard & Poor's 500 Index (dividends reinvested) is 0.994, and the Sharpe ratio for the Foolish Four is 1.088.

By this particular measure, over the last twelve years, the Keystone 5 has had a better risk-adjusted return than the market itself -- and it has beaten the Foolish Four as well.

Go Key 5!

Fool on!

New Rankings | Workshop Returns


Workshop Portfolio


9/28/01 as of ~5:30:00 PM EDT

Ticker Company Price
Change
Daily Price
% Change
Price
AETAETNA INC NEW0.943.36%28.94
BABOEING CO(1.04)(3.02%)33.36
CATCATERPILLAR INC1.112.53%44.91
COGCABOT OIL & GAS 'A'0.693.59%19.90
DDDU PONT (EI) DE NEMOURS0.992.74%37.14
DGXQUEST DIAGNOSTICS(0.45)(0.73%)61.42
EKEASTMAN KODAK0.421.31%32.49
GMGENERAL MOTORS1.393.38%42.55
LHLABORATORY CORP AMER HLDG(NEW)1.141.42%81.21
MOPHILIP MORRIS COS(0.76)(1.55%)48.24
NEWPNEWPORT CORP0.261.90%13.97
NVRNVR INC(0.54)(0.38%)140.41
PKXPOHANG IRON & STEEL ADS1.097.51%15.61
PVNPROVIDIAN FINANCIAL1.075.64%20.04
QCOMQUALCOMM INC(0.40)(0.84%)47.16
RJRRJ REYNOLDS TOBACCO HLDGS(0.69)(1.19%)57.31
SLESARA LEE CORPUnchg.Unchg.21.09
UNFIUNITED NATURAL FOODS0.563.18%18.15
WMIWASTE MANAGEMENT(0.01)(0.04%)26.74

Overall Return -- total % Gained (Lost)
  Day Week Month Year
To Date
Since
Inception
(12/24/1998)
Workshop1.30%7.32%(12.02%)(20.66%)(18.91%)
Comparable S&P 500n/an/an/an/a(19.07%)
S&P 500 (DA)1.95%7.48%(8.33%)(21.22%)(14.88%)
NASDAQ2.02%4.71%(17.46%)(39.68%)(31.41%)
DJIA (DA)1.68%7.07%(11.07%)(17.86%)(2.22%)

Internal Rate of Return -- Annualized Rate of % Gained (Lost)
  Since Inception (12/24/1998)
Workshop(17.62%)
vs. S&P 500(17.63%)

Trade Date # Shares Ticker Cost/Share Price Total % Ret
1/8/0126MO40.9448.2417.82%
1/8/0122RJR50.1057.3114.39%
1/8/0167UNFI16.4518.1510.34%
12/24/9824CAT43.0844.914.24%
1/8/018NVR136.63140.412.77%
1/8/0140WMI27.4426.74(2.54%)
1/8/0150SLE22.5421.09(6.42%)
1/8/0161PKX17.8315.61(12.46%)
1/8/0115DD48.8337.14(23.95%)
1/8/0129AET38.1728.94(24.19%)
1/8/0139COG28.7519.90(30.79%)
1/8/0114QCOM75.5447.16(37.57%)
1/8/018LH134.6981.21(39.70%)
12/27/9918GM73.2642.55(41.92%)
1/8/0118BA59.5333.36(43.96%)
1/8/019DGX114.4961.42(46.35%)
12/27/9920EK65.0932.49(50.08%)
1/8/0120PVN55.5020.04(63.89%)
1/8/0115NEWP74.9613.97(81.36%)

Trade Date # Shares Ticker Total Cost Current Value Total Gain
1/8/0126MO$1,064.50$1,254.24$189.74
1/8/0122RJR$1,102.25$1,260.82$158.57
1/8/0167UNFI$1,102.12$1,216.05$113.93
12/24/9824CAT$1,034.00$1,077.84$43.84
1/8/018NVR$1,093.00$1,123.28$30.28
1/8/0140WMI$1,097.50$1,069.60($27.90)
1/8/0150SLE$1,126.88$1,054.50($72.38)
1/8/0161PKX$1,087.75$952.21($135.54)
1/8/0115DD$732.50$557.10($175.40)
1/8/0129AET$1,107.00$839.26($267.74)
1/8/0139COG$1,121.37$776.10($345.28)
1/8/0114QCOM$1,057.62$660.24($397.39)
1/8/018LH$1,077.50$649.68($427.82)
1/8/0118BA$1,071.50$600.48($471.02)
1/8/019DGX$1,030.44$552.78($477.66)
12/27/9918GM$1,318.62$765.90($552.73)
12/27/9920EK$1,301.75$649.80($651.95)
1/8/0120PVN$1,110.00$400.80($709.20)
1/8/0115NEWP$1,124.37$209.55($914.83)
 
Cash: 
Total: 
$10.80
$15,681.03
 

Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.
• DJIA (DA) = dividend adjusted. Dividends have been added to the total return of the DJIA.

Note
Note: The Workshop Portfolio was launched on December 24, 1998, with $4,000 which was invested in the Foolish Four strategy. Approximately $15,000 was added on January 8, 2001, to support five additional mechanical strategies. At that time approximately $1000 was transfered out of the Foolish Four strategy to bring the Foolish Four into balance with the other strategies. (That's why the Foolish Four's overall return is not consistent with stock values.) Such rebalancing will take place each year among the strategies so that each will start out with approximately the same value at the begining of the year. No more cash additions are planned. The first four tables above show the overall performance of the portfolio. Below that we also track the performance of each component strategy. All transactions are announced publicly before being made, and returns are compared daily to the S&P 500 and the Dow. (Dividends are included in the yearly, historic and annualized returns.) Stocks are chosen using strategies developed by the Workshop community.