One of the most important skills for a trader is knowing how to measure and manage risk. The Sharpe Ratio is a powerful tool that helps you do just that, by evaluating the trade-off between risk and return.
My system calculates the ratio for over 800 stocks, as well as the rate of change in the ratio. It then uses the average to provide a comprehensive evaluation of the sectors. The chart below showcases the results in four unique zones.
The weakest Sharpe Ratios serve as an early warning signal that a sector may be experiencing an increase in risk, while the strongest ratio suggests that it’s becoming less risky or more profitable.