R41: Backtesting and Simulation

Question 1

Objective

Answer 1

• Assess the viability of a strategy using historical data

- the future will somewhat resemble the past

Question 2

Step 1

Answer 2

• Specify investment hypothesis and goal -rules: trading rule, security selection criteria aimed at achieving a goal -goal: beat a benchmark, maximize sharpe ratio
• Decide key parameters: investment universe, return definition, rebalancing/reconstitution frequency and transaction cost
• start and end date: as long as possible, but risk multiple regimes