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Bob.
Absolutely right! Just look at the equity curve of you portfolio - it always
tells me more then any number. Play with the starting dates, the parameters
and the percenteges that you risk... and you get a very good feeling. Dont
forget to testrun it on other markets too....
Volker Knapp
Wealth-Lab Inc.
http://www.wealth-lab.com
http://www.wealth-lab.de
++-----Ursprungliche Nachricht-----
++Von: Bob Fulks [mailto:bfulks@xxxxxxxxxxxx]
++Gesendet: Donnerstag, 22. August 2002 01:58
++An: Bengtsson, Mats
++Cc: omega-list@xxxxxxxxxx
++Betreff: RE: A complicated (for me) question on protfolio calculations
++
++
++I think you are worrying far too much about precision. Any reasonable
++method will give about the same result.
++
++Remember that even if you knew the exact Sharpe Ratio to 3 decimal
++places, the future market will never be exactly like the past so such
++precision is of little value in making decisions. What matter is
++whether the number is 1 or 2 or 3, not whether it is 2.1 or 2.2.
++
++Bob Fulks
++
++
++
++At 8:46 AM +0200 8/21/02, Bengtsson, Mats wrote:
++
++>A well, things were not as easy as I hoped for. I believe I can get the
++>calculations now including start capital right (I am rewriting
++a piece of
++>code I have earlier received). But I start to wonder if what I want to
++>measure is what I measure.
++>
++>All calculations are done on portfolio level, day by day. My
++interest is on
++>how good the trading system is. When looking at the portfolio
++level, I now
++>compare equity from day to day, including total capital, take
++the mean, take
++>the standard deviation, annualise the value to get a
++comparable measure. But
++>I am looking only at protfolio level now. If I were to change
++the period to
++>monthly, that would mean I had a lot fewer measurements, and
++the standard
++>deviation would be based on only one equity value per month.
++>
++>But what I have beneath the portfolio level is the trade by
++trade level. All
++>those trades would give a lot of values for each and every
++month, individual
++>means and standard deviations. To compare strategies where the
++strategy is
++>run on a whole set of stocks, thus creating a portfolio during
++backtesting,
++>is Portfolio level only a good measure? Do I need to in some
++way include the
++>details from all trades from every period to get to a more
++accurate measure
++>on the strategys Sharpe value?
++>
++>> -----Original Message-----
++>> From: Bob Fulks [mailto:bfulks@xxxxxxxxxxxx]
++>> Sent: den 11 augusti 2002 15:20
++>> To: Bengtsson, Mats
++>> Cc: omega-list@xxxxxxxxxx
++>> Subject: RE: A complicated (for me) question on protfolio
++calculations
++>>
++>>
++>> At 7:54 AM +0200 8/11/02, Bengtsson, Mats wrote:
++>>
++>> >I am trying to measure the first alternative of your two
++>> alternatives
++>> >down below, performance of the account. But it is not a real
++>> account it
++>> >is a simulation of a system trading strategy on a number of
++>> stocks, but
++>> >that does not matter.
++>>
++>> True.
++>>
++>> >I am doing the calculations you describe, but a little different,
++>> >instead of taking market to market change in account each day, I use
++>> >the accumulated portfolio change in account each day. This
++>> is what is
++>> >causing the question, I view tha change each day as being the
++>> >accumulated change to the account each day, not the sum of all
++>> >individual market changes each day. Since I want to do the
++>> calculation
++>> >on the portfolio level, I get to days where not all stocks
++>> involved in
++>> >the account traded, and thus the question what is the market
++>> value of
++>> >that stock that day. Currently, since it is not traded, I give it no
++>> >value but then the standard deviation becomes high.
++>>
++>> You take the value of the total portfolio at the end of each
++>> day. I was confused by the term "a stock didn't trade that day".
++>>
++>> > If you mean that your system didn't take a trade in that
++>> stock that day, it doesn't matter. The portfolio still
++>> has a value that day.
++>>
++>> > If you mean that there were no trades on any exchange for
++>> that stock that day (so you do not know what its true
++>> value is at the end of the day), then you could estimate
++>> its values based upon how much a market index moved since
++>> the last time it traded. You could also use the bid/ask
++>> price as guidance. I cannot imagine why you would
++>> need to be so precise, however.
++>>
++>>
++>> >If I would have done my calculations on a market to market basis, I
++>> >believe I would sort of have tha same question, one day one of the
++>> >stocks would not have been traded, the account is open, and
++>> question is
++>> >how to include that stock into the equation? Did it lose all
++> > the money
++>> >(high standard deviation)? Does it have the same value as the day
++>> >before until proved otherwise? Should I in some way try to
++>> guess what
++>> >value it really has by for exampling saying the change of
++>> the value is
++>> >the same as for all other stocks in the portfolio traded that day?
++>>
++>> The most accurate way to estimate the value is to use the
++>> "single index" model for the stock price. The return (change
++>> in value) for a day is approximated by:
++>>
++>> Return_stock = alpha + beta * Return_Index + error_term
++>>
++>> The error_term is a random variable with zero mean so can be
++>> disregarded when figuring the expected value. So you would
++>> need to determine the alpha and beta of each stock using
++>> linear regression analysis of recent days then use those
++>> numbers in the above equation. Alpha will be a fraction of a
++>> percent, plus or minus (for a daily
++>> change) and beta should be between about 0.5 and 1.5.
++>>
++>> If you look closely, all stocks have this problem to some
++>> degree since the last trade of the day may have been at, say,
++>> 3:35PM eastern time and the market may have changed quite a
++>> bit in the last hour of trading. Mutual funds have a similar
++>> problem calculating the Net Asset Value (NAV) of the fund at
++>> the end of a day.
++>>
++>> I recently had experience with a similar issue. I am using
++>> deep-in-the-money index put options to hedge a mutual fund
++>> account for a friend. These are December 2002 or March 2003
++>> options so they may not trade on some days. Thus, the last
++>> trade value shown on the brokerage website each night may be
++>> several days old. But the bid/ask price is correct as is a
++>> calculated value based upon the value of the index. In this
++>> case, the valuation is a big factor in the account value so
++>> accuracy was important to determine how well the hedge was
++>> tracking the portfolio.
++>>
++>> Bob Fulks
++>>
++>>
++>
++>
++>This message contains information that may be privileged or
++confidential and is the property of the Cap Gemini Ernst &
++Young Group. It is intended only for the person to whom it is
++addressed. If you are not the intended recipient, you are not
++authorized to read, print, retain, copy, disseminate,
++distribute, or use this message or any part thereof. If you
++receive this message in error, please notify the sender
++immediately and delete all copies of this message.
++
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