There is also an article on your reference site on MaxDd http://www.intelligenthedgefundinvesting.com/ch06.html. In fact, there were other performance measures for you to consider. while I'll need sometime to look at the AIRAP more closely. I think it is important to point out that it is just as important to understand how different ways of applying your data to generate statistical fitness can affect your final answer just as much as choosing different fitness functions. For example, consider the follwoing Rate of return calculation: Period : Discrete Rate Continuously compounded 1 100% 0.693 =log(1+1) 2 -50% -0.693 =log(1-0.5) Avg 0.25 0 As we can see the arithmetic average, or the mean of the discrete rates of return, is plus 25% per period. Yet the investment has simply doubled and then halved to return to its original value at time 0.
--- In [email protected], "tf28373" <tom...@...> wrote: > > > Hello everyone > > I have been working on the choose of fitness function following the > Howard Bundy's advices in his "Quantitative Trading Systems" and come > across M. Sharma's Alternative Investments Risk Adjusted Performance > (AIRAP). > > The equation of it is as following: > > AIRAP = [ E pi*(1+TRi)(1-c) ] 1/(1-c) - 1, > > where TRi - ith period total fund return (in my opinon it can also be > ith trade net return), c - risk aversion parameter (author suggests to > set its value to c=4), i=1,...,N - number of periods (as for me it can > be number of trades), pi - the probability of the ith period's total > return (according to the author it can be replaced with 1/N). (For > futher information please check this working paper: > http://www.intelligenthedgefundinvesting.com/pubs/rb-ms01.pdf > <http://www.intelligenthedgefundinvesting.com/pubs/rb-ms01.pdf> .) > > M. Sharma argues that this measure captures all higher moments, > penalizes for higher volatility and leverage (downside risk is penalized > more) and has all merits of Sharp ratio, though without its limitations > and disadvantages. I have carried out some simulations on the artificial > returns of different distributions and indeed it makes some difference. > Nevertheless what I am suspicious about is the fact that it was the very > first time I found this objective function even though it was created by > Sharma about 5 years ago. As for me it can mean that AIRAP is in fact > far from being effective or/and practical fitness measure at least for > trader like us and nobody use it (maybe I am wrong...). Another issue > that concerns me a bit is omission of MaxDrawDown in the equation, which > - at least for me - is a very important risk measure. According to many > experienced wise people writing on this forum (like ex Mr Bundy), an > effective fitness function shouls take Max DD or some comparable risk > measure into consideration in order to be really useful. > > What do you think about AIRAP? Should I proceed with utilizing this > function? > > I am looking forward to your response. Thank you in advance. > > Tomasz >
