3.4 Understanding Key Backtest Metrics

This article explains three of the most fundamental backtest metrics: CAGR (Compound Annual Growth Rate), Volatility, and Maximum Drawdown. Each metric shows a different aspect of a portfolio's historical performance—average annual growth, variability, and worst-case loss. The post walks through a 10-year backtest of four sample strategies (FAANG, Buffett's 90/10, Three-Fund, and SPY) and highlights how these metrics shape your understanding of both return and risk.