|
PureBytes Links
Trading Reference Links
|
Sounds like a good measure, but it seems it is a bit sensitive in a heavily
traded system. Say for example that the system is doing trades of between 3
to 30 days length. A good profit after a couple of days would then mean an
extremely high percentage return, and so would a stop loss also mean an
extremely bad percentage return.
Using these trade results to calculate mean deviation would give a very
different result from using the accumulated net return per month (assuming
enough trades from the system). Would it not? Reason I ask is that I like
the idea, but I would like to find a measure based on real trade data rather
than some montly average compared to a yearly average.
> -----Original Message-----
> From: Bob Fulks [mailto:bfulks@xxxxxxxxxxxx]
> Sent: den 16 juli 2000 15:21
> To: Bengtsson, Mats
> Cc: prosys@xxxxxxxxxxxxxxxx; omega-list@xxxxxxxxxx
> Subject: RE: A question about system design.
>
>
> At 7:09 PM -0500 7/15/00, M. Simms wrote:
>
> >MY Back-testing indicates it is a "streaky" methodology with HIGH,
> >HIGH variances of returns.
>
>
> At 9:49 AM +0200 7/16/00, Bengtsson, Mats wrote:
>
> >Do you have a recommendation for how to measure variance of return
> >and what to expect of a good system?
>
>
> Mathematically:
>
> Variance = Standard_Deviation * Standard_Deviation
>
> (But he may be using the term generically to mean "variability".)
>
> I use the Sharpe Ratio as a measure of a "good system" and it is
> also related to the standard deviation.
>
> Sharpe_Ratio = Excess_Return / Standard_Deviation_of_Returns
>
> where all terms are annualized. A good system has a Sharpe Ratio
> of over about 3.
>
> For example, if:
>
> Monthly return = 4%
> Standard Deviation of monthly returns = 4.1%
> Risk_free annual return rate = 5% (usually the T-Bill rate)
>
> then:
>
> Annualized return = 12 * 4% = 48% (assuming no compounding)
> Annualized standard deviation = SQRT(12) * 4.1% = 14.2%
>
> Sharpe_Ratio = (48% - 5%) / 14.2% = 3.0
>
> Notice that the Sharpe Ratio increases when either the return
> rate increases or the standard deviation of returns decreases.
>
> Bob Fulks
>
|