Consider Risk Adjustments When Picking Stocks

According to an article on TheStreet, Hewlett-Packard (NYSE: HPQ) provides superior risk-adjusted returns as compared to Bank of America (NYSE: BAC), based on a formula known as the Treynor ratio. BAC has risen, however, by 70% in the past year, about twice as much as HPQ. BAC’s 70% gain in share price is thus sighted as an illusion. On the other hand, Apple Inc (NASDAQ: AAPL), which surged 96% over the past year, offers the maximum 59.5% risk-adjusted returns among these three stocks.

Risk-adjusted returns signify return per unit of systematic risk and an investment with more excess return per unit of risk compensates the investor better. BAC has 28% return per unit of systematic risk, less than half that of APPL. Shares of Microsoft Corp (NASDAQ: MSFT) appreciated 52% in the past year and the company offers nearly 50% risk-adjusted returns. HPQ, which was up 37%, posts a return of 33% per unit of systematic risk.

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