Investments whose potential rewards outweigh their risks are hard to find, but they exist.
If the usual financial gauges aren't generating
, consider using a different yardstick: the
. It's the classic measure of risk and return developed by Nobel laureate William Sharpe in 1966.
To calculate a fund's Sharpe ratio, take its return and subtract the "risk-free rate," the theoretical return on securities with no default risk, such as short-term Treasuries. The difference is then divided by the fund's standard deviation, a volatility measure that reflects how far returns stray from past averages.
below have Sharpe ratios of 1 or more. Seven of them hold A-plus grades from TheStreet.com Ratings.
With the stock market on the fritz, the Sharpe ratio favors fixed-income and currency funds. The
SPDR Barclays Capital Intermediate Term Treasury ETF
, which has returned 7.3% in the past year, had the highest Sharpe ratio. The fund tracks an index of fixed-rate, non-convertible Treasuries with at least one but no more than 10 years until maturity and at least $250 million in outstanding face value. The index excludes special issues, such as Treasury inflation-protected securities, or TIPS.
Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.