1.2 Backtesting vs. Optimization
Backtesting and optimization have different purposes:
- Backtesting tests your idea.
- Optimization improves the portfolio allocation.
🎯 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 | ✅ | ✅ |
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