The world is awash with backtests that lay claim to new portfolio techniques that provide superior results for managing risk, juicing return, or both. What’s often missing is a robust stress test to confirm that the good news is more than a statistical anomaly. Crunching the numbers on a single run of history that looks encouraging is one thing; taking the backtest to the next level by simulating results across a range of alternative scenarios as a proxy for kicking the tires on the future is something else entirely. Not surprisingly, only a tiny sliver of the strategies that look good on paper can survive this higher standard. That’s a problem if you’re intent on publishing a regular stream of upbeat research reports that appear to open the door to money-management glory. But for investors wary of committing real money to new and largely untested portfolio strategies, stress testing is critical for separating the wheat from the chaff.
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