Strategy A has 35% chance of winning and a 65% chance of failure but you make 435%
Question:
Strategy A has 35% chance of winning and a 65% chance of failure but you make 435% profit upon win and lose -100% upon loss.
The STD, Variance and Expectation of Strategy A are as follows:
Expectation: (0.35 * 435) + (0.65 * -100) = 151.75 - 65 = 86.75
Variance: (0.35 * (435 - 86.75)^2) + (0.65 * (-100 - 86.75)^2) = 14007.5625
STD: sqrt(14007.5625) = 117.72
Based on this, answer these questions below:
1) Could you use the Sharpe and Calmer ratios in a binomial distribution system like this and why. If strategy A was exercised on roulette lets say? If your answer is no what is a more efficient way to compare relative strategies mathematically?
2) Calculate the Sharpe and Calmer ratios of Strategy A.
3) If there is a similar Strategy to Strategy A called Strategy B and we could split the balance into X% into Strategy A and Y% of the remaining balance into Strategy B. Using Modern Portfolio Theory (MPT) optimize X and Y for the following:
Strategy B has 33% chance of winning and a 67% chance of failure but you make 442% profit upon win and lose -98.7% upon loss.
i) What are the X and Y percentages for the maximum Sharpe ratio?
ii) What are the X and Y percentages for the maximum Calmer ratio?
iii) What are the X and Y percentages for the maximum Calmer and Sharpe ratio (maximum possible Sharpe and Calmer ratios)?
iv) Is it fair to prefer the maximum Calmer and Sharpe ratio from iii) over just the maximum Sharpe or Calmer ratios from i) and ii) that would result in the best adjusted risk and performance ratio? If yes or no expand on why or why not.
Statistics For The Behavioral Sciences
ISBN: 9781452286907
2nd Edition
Authors: Gregory J. Privitera