Ranking stocks with the Sharpe ratio and liquidity
The Sharpe ratio, defined by William Sharpe, is a fundamental investing metric. The ratio is given as follows:
The ratio depends on the returns of the asset and the returns of a benchmark. We will use the S&P 500 index as the benchmark. The ratio is supposed to represent a reward to risk ratio. We want to maximize reward while minimizing risk, which corresponds to maximizing the Sharpe ratio.
Another important investing variable is liquidity. Cash is the ultimate liquid asset, but most other assets are less liquid, which means that they change value when we try to sell or buy them. We will use trading ...
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