@alphaAKS With Sharpe returns, we are comparing the returns of the stocks and subtracting a risk free returns from it. If we are doing this for all stocks and then ranking, we can as well do it directly based on returns. As the subtracted value remains constant across all stocks it does not add value to do ranking after this. This has been the doubt that I always had.
However, with Z score, we are not ranking based on returns directly. Z score is a statistical number to show how much the stock is away from the Mean and on which side. We are ranking based on this number. In effect, we are not ranking directly based on returns, but on a factor that checks where the stock lies within its universe.
And, if we are checking over multiple look back periods, I think Z score is one of the better indicators for ranking.
| Subscribe To Our Free Newsletter |
