AppliedMultiple choice
A backtest too good to be true · Part 2 of 3
A colleague’s daily stock-selection model uses company fundamentals and shows a Sharpe ratio of 4 from 2005 to 2020. The universe is today’s S&P 500 constituents, and each fundamental is stamped with its fiscal period end date.
After fixing the universe, the Sharpe ratio falls to 2.5. What is wrong with using fundamentals stamped at the fiscal period end?
- ANothing, provided the data are as reported rather than restated
- BFiscal quarters differ across firms, so the cross-section is misaligned
- CThe numbers were released weeks later: look-ahead bias
- DFundamentals change too slowly to matter for a daily model
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