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Bank of America's 70% Gain Is an Illusion

Bank of America's stock is a laggard when you consider risk-adjusted returns.

BOSTON (TheStreet) -- Bank of America (BAC) - Get Bank of America Corp Report has risen 70% in the past year, about twice as much as Hewlett-Packard (HPQ) - Get HP Inc. Report has.

But Hewlett-Packard provides superior risk-adjusted returns, according to a formula known as the Treynor ratio. In other words, Bank of America's stock doesn't adequately compensate investors.


(AAPL) - Get Apple Inc. Report

, on the other hand, has soared 96% over 12 months


gives investors a bigger bang for their buck than both Bank of America and Hewlett-Packard when adjusted for risk.

The risk-adjusted return determines if an investment is appropriate for a particular individual. Many active investors are speculators, seeking out total return with little regard for risk. But taking into account risk is supremely important, especially as the stock-market rally is well into its second year.

The Treynor ratio takes a stock's return minus the risk-free rate, typically the yield on the 10-year Treasury, over the beta value. The result is return per unit of systematic risk.

Simply put, an investment with more excess return per unit of risk compensates the investor better. Investments with high Treynor ratios will derive more profit from risk.

Bank of America's return of 70%, less the 3.61% yield on the 10-year Treasury, over its beta value of 2.38 -- which can be found on's

quote page under Company Profile and Ratio Comparison -- results in about 28% return per unit of systematic risk.

Apple has offered an astonishing 59.5% return per unit of systematic risk over the past year, more than double that of Bank of America. While that may not be surprising given Apple's breakout successes with the iPod, iPhone and iPad, slower-growing companies also have beaten Bank of America.

Microsoft, whose shares have risen 52% in the past year, has compensated investors with about 50% in return per unit of systematic risk. Hewlett-Packard, up 37%, has afforded investors a return of 33% per unit of systematic risk.

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Consider risk adjustments when picking stocks. A hot increase will do you little good if it comes along with a huge increase in portfolio risk, which can make meeting obligations tricky. Safety always needs to be on investors' minds. As the Greek debt crisis and the

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. Report

allegations show, risks are very real.

-- Reported by David MacDougall in Boston.


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Prior to joining TheStreet Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.