1.2 Backtesting vs. Optimization

Last updated on August 26, 2025

💡

Backtesting and optimization are two powerful tools — each with a different goal. While they use similar inputs (tickers, allocations, dates), they serve distinct purposes:

🎯 Goal

Backtesting shows how a specific strategy would have performed in the past.

Optimization helps you find the best strategy based on selected criteria (like max Sharpe or min volatility).

🔍 Use Case

Use backtesting when you already have a portfolio idea and want to evaluate it.

Use optimization when you're exploring what asset mix could give you the best results under certain constraints.

⚙️ Key Input Differences

Input Setting	Backtesting	Optimization
Allocations	✅	✅
Use Shares instead of Allocations	✅	❌
Asset Constraints (min/max %)	❌	✅
Group Level Constraints (min/max %)	❌	✅
Rebalancing	✅	✅
Cash Flow Options	✅	❌
Currency Selection	✅	❌
Monte Carlo Forecast Years	✅	❌
Estimation Method	✅	✅

Backtesting tests your idea. Optimization improves the allocation.

Did this answer your question?

😞

😐

🤩