1. Commonly used data/income indicators
1. Risk-Free Rate
- The risk-free interest rate represents the interest rate that investors can expect to receive from an investment without any risk over a certain period of time. In reality, the London Inter bank Offered Rate (LIBOR) or the U.S. Treasury bond rate is usually used as the risk-free interest rate. Because it is generally believed that the chance of financial institution failure is very low, banks with financial problems will be prohibited from participating in interbank lending, so LIBOR is risk-free. Governments can issue sovereign currency to meet debt maturities, so there is no possibility of default on Treasury bonds. However, this statement does not apply to the euro. Eurozone countries did not have the authority to issue currency, hence the European sovereign debt crisis
2. Cumulative Return & Compound Annual Growth Rate (cagr: Compound Annual Growth Rate)
- Cumulative Return: Cumulative return = (Ending Value/Beginning Value)
- cagr is calculated as the n square root of the total growth rate as a percentage, where n is equal to the number of years in the relevant period. CAGR = (Ending Value/Beginning Value)^(1/# of years)-1
3. gross leverage
- The total leverage ratio is the sum of the absolute values of exposure divided by net asset value (NAV), excluding long and short offsets and hedging. The total leverage of a $100 million long position in S&P 500 stocks and a $100 million short position in S&P 500 futures is 200%. This indicator reflects the overall level of investment activity and is one of the areas of concern for counterparty risk and liquidity risk.
4. Max Drawdown
- Describing the worst possible scenario for a strategy refers to the extent to which the net value of a product falls from its highest point to its lowest point within a certain period of time. The specific calculation method is: max(1 - strategy value on the day/highest net value of the product before the day)
- For example: the initial net value was 1 on July 20, 2010; coincided with the launch of QE2 in the United States in October 2010, global stock markets surged, and the fund's net value increased to 1.8; thereafter, the domestic stock market fluctuated violently. As of April 25, 2011, the fund's net value The net value is 0.98. Assume that investors subscribe during the peak period and redeem it at the lowest period half a year later, resulting in a loss of 45.5%. This is the instructional meaning of the maximum retracement rate to investors who are pursuing purchases at high levels.
5. Volatility
- It is the degree of volatility of financial asset prices, a measure of the uncertainty of asset returns, and is used to reflect the risk level of financial assets. The higher the volatility, the more violent the fluctuations in financial asset prices, and the stronger the uncertainty of asset return rates; the lower the volatility, the gentler the fluctuations in financial asset prices, and the stronger the certainty of asset return rates. The specific calculation method is: the annualized standard deviation of the strategy’s daily return
6. win rate
- Win rate is defined as the number of wins divided by the total number of buy-ins
- For example: after investing ten times, making profits seven times and losing money three times, the winning rate is 70%.
7. win loss ratio
- The win-loss ratio is also called the "success rate." The win/loss ratio is the ratio of the total number of winning trades to the number of losing trades. It does not consider how much money was won or lost, only the number of wins and losses.
8. Risk return ratio
- Also called odds. It refers to the ratio of profit and loss in each transaction, which represents the risk-return ratio of investment. The profit-loss ratio of the investment system = the sum of profits of all investment profit orders in a period / the sum of losses of all loss orders in the same period of time. An investment profit-loss ratio of 3 means that on average you earn 3 yuan and have to pay a stop loss of 1 yuan. In other words, an investment that risked one dollar made a profit of three dollars. In the long run, the investment profit-loss ratio is a quantitative indicator that directly reflects the comprehensive level of investors.
- The systems of successful people who make big money stably in the long term are systems with a high profit-loss ratio. Only a system with a high profit-loss ratio can become a winner and be considered a stable profit.
- For example: the average profit is 30% each time, the average loss is 10% each time, the profit-loss ratio is 3 times
9. Alpha (alpha, α value)
- Investors receive returns that are independent of market fluctuations, also called excess returns. For example, if an investor earns a 15% return and his or her benchmark earns a 10% return, then the Alpha or value appreciation component is 5%.
10. Beta (beta, beta value)
- Reflects the sensitivity of the strategy to changes in the broader market. For example, if a strategy's Beta is 1.5, when the market rises by 1%, the strategy may rise by 1.5%, and vice versa. The specific calculation method is: the covariance of the daily return of the strategy and the daily return of the reference standard/the variance of the daily return of the reference standard.
- Beta coefficient = Covariance(Re, Rm)/Variance(Rm)
where: Re is the return of a single stock, Rm is the return of the overall market, Covariance is the change in stock returns relative to the overall market returns, and Variance is the distance between market data and the average. Amplitude
11. Sharpe ratio
- The Sharpe ratio describes how well an asset's returns compensate investors for the risk they bear. When comparing two assets on the same basis, the asset with a higher Sharpe ratio has better returns with the same risk; in other words, if the returns are the same, the asset with a higher Sharpe ratio has lower risks. However, like any other mathematical model, it relies on the correctness of the data
- sharpe ratio = (Rp - Rf)/ σ p
where Rp is the return of the portfolio, Rf is the return of the risk-free asset, σ p is the standard deviation of the portfolio’s excess return
12. Information Ratio
- The information ratio is similar to the Sharpe ratio, with the main difference being that the Sharpe ratio uses risk-free returns (such as U.S. Treasury bonds) as a benchmark, while the information ratio uses a risk index as a benchmark (such as the S&P 500 Index).
- The specific calculation method is: (strategy cumulative return - benchmark cumulative return)/standard deviation of the difference between the strategy and the benchmark daily return. [Meaning]: The larger the information ratio value, the better the performance. It is based on Markowitz's homogeneous model, which can measure the homogeneous characteristics of a fund and represent the excess return brought by a unit of active risk.
13. sortino ratio
- Similar to the Sharpe ratio, except that it differentiates between good and bad volatility, so instead of standard deviation when calculating volatility, it uses downside standard deviation. The implicit condition is that the portfolio's upside (positive returns) is consistent with the investor's needs and should not be included in the risk adjustment. The specific calculation method is: (strategy income-risk-free interest rate)/strategy downside volatility. [Scope of application]: Because the Sortino ratio uses downside deviation to consider risk, all downside deviation limitations will also appear in the Sortino ratio. That is, there must be enough "bad" observations to calculate a valid Sortino ratio. The larger the sortino ratio value, the better the performance.
14. calmar ratio
- Karma ratio = excess return/maximum drawdown (risk)
- The only difference between the Karma ratio and the Karma ratio is that the denominator is different. The Sharpe ratio uses the standard deviation as the risk, and the Karma ratio uses the maximum drawdown as the risk. Essentially, they both measure the risk-return relationship of the fund.
15. Omega ratio
- The omega ratio actually takes into account information about the entire distribution of returns, and therefore includes information about all higher-order moments. When the critical return is equal to the mean, the Omega ratio is equal to 1. Under the same critical rate of return, for different investment options, the larger the Omega ratio, the better. Scope of application: Omega is a very good alternative when the return rate does not obey the normal distribution. [Meaning]: The higher the Omega ratio, the better the investment performance will be.
16. Tail ratio
- The 95th percentile/5th percentile of daily return distribution. [Scope of use]: Mean reversion strategy. The biggest risk of this type of strategy is the tail risk on the left. A single large drawdown takes a long time to recover. Therefore tail_ratio is very suitable to characterize the risks faced by this type of strategy. [Meaning]: The bigger the tail ratio, the better. It can be understood as an indicator of the best-case and worst-case return performance. For example: tail_ratio = 0.25, the loss at the 5th percentile is four times the gain at the 95th percentile. Such a strategy is difficult to recover in a short period of time in the event of a large loss.
17. Common sense ratio
- (95th percentile value/5th percentile value of daily return distribution) * (total profit/total loss). [Scope of use]: Mean reversion strategy, trend following strategy. [Meaning]: When it is greater than 1, the strategy makes a profit; when it is less than 1, the strategy loses money
18. Skewness
- Also known as skewness, it measures the asymmetry of the probability distribution of real random variables in probability theory and statistics. The value of skewness can be positive, negative or even undefined. Quantitatively, negative skewness (negative skewness; left-skewed) means that the tail on the left side of the probability density function is longer than the tail on the right side, and the vast majority of values (not necessarily including the median) are on the mean to the right of the value. Positive skewness (positive skewness; right skew) means that the tail on the right side of the probability density function is longer than the tail on the left, and most values (not necessarily including the median) are to the left of the mean. A skewness of zero means that the values are relatively evenly distributed on both sides of the mean, but does not necessarily mean that the distribution is symmetrical.
19. kurtosis
- Greater than 0 indicates that the distribution of returns is steeper compared to the normal distribution
20. Coefficient of determination (R2)
- R^2 of the regression of cumulative log return on time t. [Meaning]: The R-squared value is an indicator of the fitting degree of the trend line. Its numerical value can reflect the fitting degree between the estimated value of the trend line and the corresponding actual data. The higher the fitting degree, the reliability of the trend line. The higher it is. The R-squared value is a value ranging from 0 to 1, also known as the coefficient of determination. It is the most commonly used indicator to evaluate the quality of a regression model.
2. Communication
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- Public account: Zhugeshuotalk
- Quantitative website: zhugetalk.cn
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3. Reference
- Risk-free rate: wikipedia
- cagr: https://www.investopedia.com/terms/c/cagr.asp
- Volatility: http://abcexchange.io/terms/v/volatilityquotetrading.asp
- Win-loss ratio: https://www.investopedia.com/terms/w/win-loss-ratio.asp
- alpha: https://www.investopedia.com/terms/a/alpha.asp
- beta: https://www.investopedia.com/terms/b/beta.asp
- sharpe: https://www.investopedia.com/terms/s/sharperatio.asp
- Information Ratio: https://www.investopedia.com/terms/i/informationratio.asp
- sortino: https://www.investopedia.com/terms/s/sortinoratio.asp
- calm: https://www.investopedia.com/terms/c/calmarratio.asp
- skew: https://www.investopedia.com/terms/s/skewness.asp