Reading 41: Backtesting and Simulation

I. Survivorship Bias Survivorship bias occurs when a conclusion is drawn from data whose scope only captures companies that survived until the date the backtesting was done. It is worth clarifying that many practitioners fail to quantify the effects of…

Backtesting is an investment strategy evaluation technique. It uses past data to test real-life investment processes to assess whether a strategy would yield desirable outcomes. Objectives of Backtesting Backtesting offers investment strategy-related rigor and insight to investors. Backtesting is used…

There are three steps in backtesting: strategy design, historical investment simulation, and analysis of backtesting. Step 1: Strategy Design The first step is to formulate the investment hypothesis and goals. An active strategy would aim to achieve excess returns above…