Problem

Following up on the strategy from exercise 1.

(a) What is the sensitivity of SR to a 1% change in each parameter?

(b) Given these sensitivities, and assuming that all parameters are equally hard to improve, which one offers the lowest hanging fruit?

(c) Does changing any of the parameters in exercise 1 impact the others? For example, does changing the betting frequency modify the precision rate, etc.?

Exercise 1

A portfolio manager intends to launch a strategy that targets an annualized SR of 2. Bets have a precision rate of 60%, with weekly frequency. The exit conditions are 2% for profit-taking, and -2% for stop-loss.

(a) Is this strategy viable?

(b) Ceteris paribus, what is the required precision rate that would make the strategy profitable?

(c) For what betting frequency is the target achievable?

(d) For what profit-taking threshold is the target achievable?

(e) What would be an alternative stop-loss?