Test Drive Your Portfolio

Most of our decisions in life are based on back-tests. We date before we get married.  We test drive different cars before we settle on the "right one."  We walk through several houses before we decide which to buy.  Each of these decisions involve forming an opinion based on historical observations.  Why not show such diligence with our investment portfolios?

Because iQUANT.ca models follow a predetermined set of rules, it is possible to test the set of rules against the rigors of time. This is called "back-testing."   As long as an idea can be quantified, it can be back-tested.

Back-testing is the process of testing a model against historical time-series data. The underlying theory is that a strategy that worked well in the past is likely to work well in the future, and conversely, any model that performed poorly in the past is likely to perform poorly in the future. Rather than utilizing backtesting to find the best…it can be more effective to simply eliminate the worst.

Back-testing Example

Some Pitfalls of Back-testing

Backtesting is a great way to get a sense for a strategy and how it has performed in the past. That said, there are some important risks to keep in mind:

Survivorship Bias: This is when a stock has been delisted or acquired and is not included in the backtest results. iQUANT has eliminated to the best of its ability the survivorship bias by utilizing data that includes all stocks that were delisted or acquired.

Restatement Bias: This is when a company restates its historical financials. iQUANT has eliminated to the best of its ability any restatement bias by utilizing data that is point-in-time from S&P Global and Ford Equity Research.

Split Bias: This is when a company has had a historical stock split. We have adjusted to the best of our ability stock splits from 1 January 1974 - to date using S&P Global and Ford Equity Research data.

Look Ahead Bias: This is when a company reports its financials at a point that was after or not available at the end of the quarter. iQUANT has eliminated to the best of its ability any restatement bias by utilizing data that is point-in-time from S&P Global and Ford Equity Research.