Tuesday, September 8, 2009

Live Test - Performance Summary #2

Here's another look at how the model portfolio has performed compared to the benchmark index. The blue bars show the returns over the past 52 weeks, and the gold bars show the returns over the full 87 weeks of the live test.

You can see from this chart that the S&P 500 index lost an increasing amount of money as the live test progressed, while the model portfolio gained an increasing amount over the same period. This dynamic results in a very rewarding "excess return."

In financial circles, excess return is often referred to as "alpha." The chart shows that the system is generating a lot of alpha. This is good because alpha is the best measure of the "value added" by an active portfolio management system, above the returns generated by a standard buy-and-hold approach.

These results show that the trading system is "durable" because it maintained and actually exceeded its expected performance during the 2o month live test period. The system is also "robust" because its performance held up well under market conditions that were far more adverse than the prevailing conditions during the system development period.

These live test results are consistent with the test results obtained during system development. This is good.

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