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Hi Robert --
What I wrote was:
"Again, the choice will be between multistage development and single stage development.
The multistage approach assumes that the best individual A, B, and C
create the best portfolio P. This approach has each of A, B, and C
being developed, tested, and validated separately."
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I was making the point that the two stage approach begins with stage one -- the development of three individual trading systems, A, B, and C. After the developer is satisfied with those, stage two combines the three individual systems into a portfolio. A, B, and C, will be the best they can be, according to the objective function used to develop them. The portfolio will be as good as the input to it allows.
The alternative is to develop the three systems and the portfolio in a single stage development process. That process will be much more complex. But, after it is done, the portfolio will be the best it can be. This portfolio will most probably be much better than the portfolio developed using the two stage approach, but each of the three component system will probably be inferior to the A, B, and C developed using the two stage approach.
In the two stage process, the three individual systems are the best they can be, but the portfolio is not. In the single stage process, the portfolio is the best it can be, but the three individual systems that make it up are not.
Thanks,
Howard
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