Backtesting and Simulation

Free CFA Level II lesson in Portfolio Management. 15 min read, ~2,178 words.

Three core biases: survivorship (failed entities excluded), look-ahead (future data used at the decision date), data-snooping (best of many tests reported as one hypothesis). Out-of-sample testing is the strongest defense against overfitting; in-sample performance alone proves nothing, and a large in-sample/out-of-sample gap is the diagnostic. Walk-forward analysis beats a single...