Evaluate Returns
Kerry Back
Overview
- Suppose we’ve run a backtest and saved the portfolio returns.
- Evaluate raw returns: accumulation, drawdowns, mean, std dev, Sharpe ratio
- Evaluate relative to benchmarks
- Compare to the market on a beta-adjusted basis
- Compare to the market and other factors (attribution analysis)
Drawdowns
- A drawdown occurs whenever your portfolio value is not as high as it once was
- The percent drawdown is (current value - prior max) / prior max.
Statistics
- mean and std dev of monthly returns
- annualize mean by \(\times\) 12
- annualize std dev by \(\times\) sqrt(12)
- compute monthly excess returns (in excess of T-bill rate), mean and std dev and Sharpe ratio = mean / std dev
- annualize Sharpe ratio by \(\times\) sqrt(12)