Risk Managed Performance

Since I am using a system based approach here, I will explain some of the statistics I use in my scorecard.

Statistics are used to show that the model is generating excellent risk-adjusted returns, along with a low correlation to the market. A low correlation indicates that the system is appropriate for all market conditions, suitable for holding throughout the complete Bull-Bear cycle.

The CAGR% (Compound Annual Growth Rate) is the total return generated by the model. Many trading systems are optimized for CAGR% alone, with the idea that a higher number is always better. Not always! A better goal is to maximize risk-adjusted return. So in addition to absolute return, this system considers several factors that impact the return/risk.

The Sharpe Ratio is a measure of reward-to-risk efficiency. It measures whether the investor gains at least one unit of return for each unit of risk. The higher the number, the better.

The RSQ correlation coefficient measures the degree to which movement of the model portfolio is related to that of the S&P 500 index. It is a measure of the beneficial effect of diversification. for a diversified portfolio, you want to see the its correlation coefficient within a target range of 0.50 and zero.

The Maximum Equity Drawdown (MDD) is another way to measure the riskiness of a trading system. It measures the maximum interim equity loss from a peak to the following trough.

Beta is a popular statistical measure of risk, measuring the model portfolio's volatility in relation to that of the S&P 500 index.