Fundamental Law Flashcards
1
Q
Fundamental Law
A
Performance = skill * sqrt(breadth)
2
Q
Information Ratio
A
Summary of performance
“Sharpe Ratio” of excess returns
3
Q
Information Coefficient
A
Summary of skill
4
Q
Trading opportunities
A
Breadth
5
Q
Expected Return
A
bets * ((Pwin)(win amount) + (Plose)(lose amount))
.51 * 1000 + .49 * -1000 = 20
6
Q
Risk Calculation
Reward / Risk
A
Probability of losing - (% risk losing) ^ number of attempts
expected reward / standard dev reward
7
Q
Fundamental Law Lessons
A
Higher alpha generatess higher sharpe ratio
More execution opportunities provides higher sharpe
sharpe ratio grows as square root of breadth
8
Q
Information Ratio Calculation
A
mean alpha(t) / std alpha(t)
