AppliedMultiple choice
The best of a hundred backtests · Part 2 of 3
A researcher tries 100 variants of a signal on five years of daily data. In truth every variant has a Sharpe ratio of zero. The best variant shows an annualised in-sample Sharpe ratio of 1.3.
Roughly what best in-sample Sharpe ratio would 100 worthless, independent variants be expected to produce?
- AAbout zero, since each variant’s true Sharpe is zero
- BAbout 0.45, one standard error
- CAbout 1.1
- DAbout 1.35, from √(2 ln 100) ≈ 3.0 standard errors
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