The best of fifty backtests looks amazing
Asked at Two Sigma
Your team backtested candidate strategies, ranked them by Sharpe ratio, and promoted the single best one, which showed against zero. You expect it to perform in production much as it did in the backtest.
Why is the promoted strategy's estimated edge likely overstated, and how should you evaluate it instead?
Show a hint
You did not test one strategy. You tested 50 and picked the maximum. What does taking the maximum do to noise?
Your answer
This one is open-ended. Work it through, then check your reasoning against the full solution.