Stats › Backtesting and evidence › Backtest overfitting
Ten backtests on pure noise produce a Sharpe of 1.57
Computed from Proposition 1 (equation 2.4) of Bailey, Borwein, Lopez de Prado and Zhu. My calculation returns 1.575 at N = 10 against the 1.57 the paper states, and 2.616 at N = 128 against the "above 2.6" the paper states, so the equation is transcribed correctly. All figures assume a one year backtest.
Every configuration tried in a backtest is another draw, and the best is kept. On a strategy with no edge, ten tries on one year of data produce an expected Sharpe of 1.57. Five years of data supports forty five tries, and no more.
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