Chapter 7 · Section 6 practice

Strategy Selection and Multiple Testing

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These questions review the examples in the companion slides. Choose an answer, then check the explanation.

Question 1

A colleague reports: “the best of my 40 rules has Sharpe 1.1 over ten years.” Is that evidence the rule works?

  • Yes — 1.1 over ten years is t = 3.5, far beyond 2
  • Yes, if the rule has an economic story
  • No — nothing that comes from a search can be evidence
  • Not by itself — the expected best of 40 noise trials is already above 0.6; the answer needs \(N\), the trial variance, \(T\), skew and kurtosis