By Murray Coleman

A common theme among fund analysts is risk-adjusted returns. The idea is to take a managers investment strategy and try to measure those results against how much a funds performance varies over time. One of the best ways to do such a comparison is by looking at so-called Sharpe Ratios.

Developed by Nobel Laureate William Sharpe. funds with higher ratios are considered to have better risk-adjusted records. Its a concept that can also be applied to stocks. Today, Goldman Sachs put out a research note on its application of Sharpe Ratios to stocks, updating a basket of 50 leading names with high Sharpe Ratios.

We believe portfolio managers should evaluate potential stock investments on a Sharpe Ratio basis rather than just looking at target prices, the report found. Our analysis suggests a Sharpe Ratio strategy may cause core mutual fund managers to rethink roughly 20% of their holdings. Specifically, Goldman found roughly 80% “cross-over” between portfolios using Sharpe Ratios and those commonly used by hedge fund managers employing an absolute return strategy.

(Typical mutual fund strategies are considered relative return strategies since they aim for long-term, relative performance standards regardless of shorter-term fluctuations and losses of capital.)

The Goldman High Sharpe Ratio Basket, a sort of Sharpe Ratio fund, has outperformed the S&P 500 by 23 percentage points (47% vs. 24%) since December 2009 and by 10 percentage points since it was rebalanced six months ago (21% vs. 11%).

The basket also compares favorably to a universe of 200 large-cap core mutual funds, ranking in the top percentile on both a total return and risk-adjusted basis, the report adds.

Such an emphasis on Sharpe Ratios, Goldman concluded, could help mutual fund organizations stem the tide of cash flowing into ETFs and other passive investment products by boosting the risk-adjusted return at the fund level vs. a benchmark and vs. competitors.

Goldman has rebalanced the basket, something it says should be done every six months. Heres its list of top stocks ranked by Sharpe Ratios for each sector (with their respective current Sharpe Ratios):

Consumer Discretionary: Ford (F ) at 1.2, Newell Rubbermaid (NWL ) at 1.02

Consumer Staples: Coca-Cola (KO ) at 0.88. Archer-Daniels-Midland (ADM ) at 0.88

Energy: Cameron International (CAM ) at 1.03, Pioneer Natural (PXD ) at 0.93

Health care: Medco Health Solutions (MHS ) at 0.76

Industrials: Southwest Airlines (LUV ) at 1.39