Statistical & Quantitative Methods Flashcards
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Read the first 7 Statistical & Quantitative Methods flashcards as text
How does an Exponential Moving Average (EMA) differ most significantly from a Simple Moving Average (SMA)?
Answer: The EMA gives progressively greater weight to more recent price data
An EMA applies exponentially greater weights to more recent prices, making it more responsive to recent price changes than an equally-weighted SMA.
In hypothesis testing for trading system validation, what does a p-value of 0.05 indicate?
Answer: There is a 5% probability the results occurred by chance, indicating statistical significance
A p-value of 0.05 means there is only a 5% probability the observed results occurred by chance, indicating the results are statistically significant at the 5% level.
What does the Sharpe Ratio specifically measure in trading strategy evaluation?
Answer: The excess return earned per unit of total risk (standard deviation)
The Sharpe Ratio measures the excess return above the risk-free rate per unit of standard deviation, providing a risk-adjusted performance metric for comparing strategies.
What does the Coefficient of Variation (CV) measure in financial analysis?
Answer: The relative variability of returns expressed as a percentage of the mean return
The Coefficient of Variation expresses standard deviation as a percentage of the mean, enabling meaningful comparison of risk across securities with different price levels.
What is 'overfitting' in the context of developing a technical trading system?
Answer: Optimizing a model so precisely to historical data that it captures noise rather than true patterns, reducing future predictive power
Overfitting (curve-fitting) occurs when a trading model is calibrated too precisely to historical data, capturing random noise instead of genuine patterns and causing poor out-of-sample performance.
In a linear regression channel applied to a price chart, what do the outer channel lines represent?
Answer: Price boundaries set at a specified number of standard deviations above and below the regression line
A linear regression channel draws parallel lines at a specified standard deviation distance above and below the central regression line, creating statistically-derived price boundaries.
What is the primary limitation of backtesting a technical trading strategy on historical data?
Answer: Past performance does not guarantee future results as market conditions and regimes change over time
While backtesting evaluates historical performance, changing market conditions and structural shifts mean past performance does not reliably predict future results.