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Showing posts from June, 2018

The Siren of Statistics

A siren was a mythological being who lured sailors with their enchanting music to shipwreck on the rocky coasts of their island. Their songs were almost impossible to resist. But more generally a “siren” is a bad thing that we are attracted to, either physically or psychologically.
For investors, an example of a siren’s song is simplicity. Many investors are prone to looking for just a few metrics to evaluate a fund or a strategy. This is a problem. It is a problem for me because my answers to reasonable sounding questions will be incomplete. “What is your Sharpe ratio?” sounds reasonable enough. But the answer on its own is close to meaningless without a much more detailed elaboration. What is the sampling error around the point estimate? How constant has it been across sub-periods? How distorted is it due to the shape of the full return distribution? But, more importantly, it is a problem for the investor because the simple answer gives a false sense of certainty.
Is the Sharpe rat…