The Sharpe ratio update

A little over a year ago we published a blog post noting that risk-adjusted return for US stocks had been unusually high.  Specifically the Sharpe ratio – return in excess of the return on cash divided by volatility – was at a historically high level. The conclusion was that it had been nice for investors but was unlikely to be sustainable. Since then, every piece of the equation has moved to lower the Sharpe ratio. Cash interest rates have risen, volatility has increased, and stocks have posted lower returns.

Source: Bloomberg 2018

While not as nice for investors, this is more in line with what we would expect from equity markets. We’ll be releasing a webinar in January with our outlook going forward, but to sum up: expectations for positive return should go hand in hand with expectations for volatility.

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