I recently added SPO to my portfolio given how heavily discounted this stock currently is (at a forward PE of 8.0!).
Because it will be a medium-term hold for me, I needed to reoptimise my portfolio to account for this stock. In doing so, I had to calculate the sharpe ratio for SPO.
I find that SPO has a ex-ante sharpe ratio of 2.29 - which represents a very good risk-return investment.
For those who are wondering what a Sharpe ratio is, please read here.
Let me briefly explain my methodology.
Sharpe ratio = (E(r) - rf) / Std. dev of stock
- I used CAPM to estimate expect return E(r) of SPO. - I used ASX 300 as market return to blackout the Beta for SPO - 0.846. - Market risk premium is 7%
- 180 days of return time-series - 02042015 - 26112015 (I omitted the return series after the Dick Smith announcement)
- Risk-free rate is 2%.
Caveat:
I did this on my free time and posted this just as another piece of information for HC users. I'm open to anyone who wants to offer refinement to the model.
Again, always, DYOR.
