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Pro Analysis

This simple stock-picking strategy from Goldman Sachs is killing the market this year

Traders work on the floor of the New York Stock Exchange in New York City.
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Traders work on the floor of the New York Stock Exchange in New York City.

A strategy based on a ratio from a Nobel Prize–winning economist and developed by Goldman Sachs is beating the market by 10 percentage points this year, according to the firm.

"Our high Sharpe ratio strategy has generated stellar 2016 results from both an absolute and risk-adjusted perspective," chief U.S. equity strategist David Kostin wrote in a note to clients Friday. "We expect the newly rebalanced high Sharpe ratio basket will continue to outperform S&P 500 on a risk-adjusted basis in 2017."

The Sharpe ratio was developed by economist William Sharpe in the 1960s. It measures the average performance of a security in excess of a risk-free return, adjusted for price volatility.

Kostin said the firm's portfolio based on the ratio is up 23 percent year to date and has a higher risk-adjusted return than 98 percent of large-cap mutual funds.

The basket includes the 50 S&P 500 stocks with the "highest prospective Sharpe ratios" using Wall Street consensus forecasts and the volatility implied by stock option prices. The basket is rebalanced twice a year in June and December.

The strategy beat the market by 7 percentage points per year since 1999, according to the strategist.

Here is a selection of seven Goldman Sachs "High Sharpe Ratio" basket stocks.