If you’ve been reading this blog for a while, you know that I’m a fan of quant investing. It’s the only way to outperform traditional strategies for long-term investors and it’s easy to understand why: you can use math and statistics to identify undervalued stocks, then buy them at low prices and sell them at high.
The Equity Curve
The equity curve is the graph of your investments. It shows the value of your investments over time, and can be used to compare performance to a benchmark. You can also use it as an indicator of risk.
The Expected Return Curve
Expected return is the weighted average of all possible outcomes. It’s a measure of risk-adjusted profitability, and it can be used to evaluate how well a strategy is performing relative to its peers. The expected return curve shows you how much money you should expect from each asset class based on historical data, as well as its current price level and volatility.
If you take any two assets with similar characteristics (such as stocks or bonds), their values will be spread out along an upside-down U shape over time; this means that when one asset goes up in value due to growth or other factors, another asset has to go down in order for both returns to line up–and vice versa when one falls below par with its peers due to declines in prices or interest rates
Understanding Losses and Gains
When you’re investing, it’s important to understand what your risks are. The more you know about them, the better equipped you will be to manage them and make informed decisions.
Risk is one of the most misunderstood aspects of investing. It’s easy for anyone who has never traded stocks or bonds before (or even taken on a simple savings account) to mistakenly believe that risk is simply an equation that involves two independent variables: the amount invested and your return expectation. In reality, however, there are many factors contributing toward risk exposure–including time frame (e.g., daily vs weekly), asset class (e.g., stocks vs bonds), investment style/strategy used (e.g., value vs growth), etc.–and each one has its own unique impact on how much potential loss can occur before there’s even an opportunity for gainful participation in this complex world called financial markets!
How to Calculate the Sharpe Ratio
The Sharpe ratio is a measure of how much more you can expect to make by investing in the stock market than you would by investing in a risk-free investment, such as money market funds.
The Sharpe ratio takes into account both your expected return and the risk-free rate. The formula used to calculate this ratio is:
Sharpe Ratio = Expected Return – Risk-Free Rate (or Beta) – 1
To outperform traditional strategies, you must quantify your investment ideas.
There are many ways to improve your investment returns. One of the most effective is quant investing, which involves using data and algorithms to generate new ideas for investments. Quantitative investing has outperformed traditional strategies over time because it can help you identify undervalued opportunities in the market where few others see them.
The first step to becoming a successful quant investor is understanding how quantitative research works, what it involves, and how it can help improve your returns.
These are just a few of the different ways to think about how quantitative investing outperforms traditional strategies. If you want to get started with quant investing, check out our full-featured platform: Quantopian.
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