Assess Backtest Risk and Performance Metrics with Pyfolio
No single risk or performance metric tells the entire story of how a strategy might perform in live trading. Metrics such as the Sharpe ratio, for instance, focus mainly on returns relative to volatility but neglect other risks such as drawdown or tail risk. Similarly, using only maximum drawdown as a measure ignores the risk-adjusted returns and might discard strategies that are robust but temporarily underperforming. The composite view obtained through multiple metrics provides a more nuanced understanding of how the strategy is likely to behave under varying market conditions. Taking it a step further, visualizing risk and performance metrics over time can capture strategy dynamics over time. A strategy might exhibit robust metrics during a bull market but underperform in terms of risk-adjusted returns during a bear or sideways market.
In this chapter, we introduce Pyfolio Reloaded (Pyfolio), which is a risk and performance...
