Columbus Strategy Report – May 2018 Edition

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The 3 Edges of the Sharpe Ratio

There are several ways to measure investment performance.  One such useful measure is the Sharpe ratio, created by Nobel laureate William Sharpe in 1966.  It is widely used because it combines annualized returns with risk into one single number. Why does it matter to combine returns with the risk levels in a single figure? Let me illustrate through a simple

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Annualized Return or CAGR

The Annualized Total Return, also called the Compounded Annual Growth Rate (CAGR), is a useful number to describe the performance of an investment.  Never confuse this with Annual Returns, which is a bunch of numbers that show the returns of an investment for each year during the investment time frame.  Contrary to this, the annualized return is a single number

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Backtesting Strategies & Overfitting

Strategy backtesting is often used to test an investment strategy from historical stock or ETF information (usually price).  The belief is that if a strategy performed well in the past, then it should continue to perform well in the future.

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