Topic · Research Practice & Backtesting
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32 articles · 5 checkpoints · 18 deeper reads · 9 reference notes
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Turning a daily Sharpe ratio into an annual one means picking a day count and assuming returns are independent. Both choices are usually wrong by enough to flip a manager ranking.
A single Sharpe ratio from a backtest is a point estimate from a noisy, finite sample. Bootstrapping resamples the return history to show how wide the range of plausible true Sharpe ratios actually is.
A single Sharpe number hides how a strategy's return changes as you size it up. A capacity-adjusted return curve reports performance as a function of book size instead of pretending there is only one.
A strategy's raw return can look like skill and be nothing more than a tilted bet on well-known factors. Regressing returns on a factor model separates the alpha you can claim credit for from the beta you were carrying for free.
A manager can post a genuinely good return and still watch an investor lose money in the same account, because the investor's own timing of deposits and withdrawals gets baked into one of the two standard ways to measure performance and stripped out of the other.
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