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Investing/Strategies / Mechanical Investing
|Subject: Re: Optimizing Blends with Sharpe/(GSD^x)||Date: 11/17/2007 7:46 PM|
|Author: Zeelotes||Number: 203998 of 265186|
Can you explain the difference between the two results?
The test in this thread is based on ranks 1-4, while the test in the previous thread is off of ranks 1-10. I purposefully chose a lookback of 20 years for this test because the Sharpe and Sharpe/GSD had the exact same resulting Sharpe from the backtests. I wanted to put them on an even footing. Here is a table showing Ranks 1-10 as I posted before with Ranks 1-4 on the right side for comparison.
Ranks 1-10 Ranks 1-4
You indicate that your first test started in 1999. Did you mean 1989?
No, it has to start in 1999 to put VL and SIPRO on a more or less even footing. Remember, this is investing in six screens with three from each.
My vote would be to stick with Sharpe/GSD (X=1). I'm not sure how much better it is as a predictor over Sharpe alone, but your results would suggest that it is not any worse.
I see it as better mainly because it consistently results in a much lower GSD. Let me illustrate:
Years Ranks 1-10 Ranks 1-4
Note how the standard deviation across all lookbacks is half in both rank cases between Sharpe and Sharpe/GSD. Also take note of the fact that the Median and Average GSD is about 40% lower for Ranks 1-4. I consider a GSD at or around 10 to be a significant lure.
The same thing as above on Sharpe -- here I'm seeing a 20% improvement in Sharpe/GSD over Sharpe alone on ranks 1-10, with a 7-8% improvement on ranks 1-4 -- which I'd just call noise if it wasn't for the ranks 1-10 results, and the results in GSD above.
Years Ranks 1-10 Ranks 1-4
And if you're not aiming for high CAGR, why aren't you? If your answer is "pain" or "short time horizon," well, you're already investing in a manner than can cause great pain. I want a better answer.
It's really quite simple, CAGR is much less predictive than GSD -- in fact, there is no comparison. Consequently, I have a whole lot more confidence in the GSD side of the Sharpe equation staying pretty much static between the backtest and real-time results. I don't have anywhere near that level of confidence in the CAGR side. So when I find a backtest result with a relatively high CAGR, but extremely low GSD, and resulting high Sharpe, I prefer that over the other options. When you examine the yearly returns you also see a much higher degree of consistency. The Jensen, for example, tends to produce a very high CAGR, but a lot of that comes from three or four exceptional years.
This and what I've shown above is the reason why I'm grateful to have Sharpe/GSD as a new tool in my box -- thanks go to StevnFool for this!
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