Target Volatility Flashcards
(25 cards)
What is a fitness function in trading strategy?
A fitness function is a quantitative measure used to evaluate the performance of a trading strategy.
True or False: A higher fitness function value always indicates a better trading strategy.
True, but it depends on the context and criteria used for the fitness function.
Fill in the blank: The fitness function helps in optimizing a trading strategy by __________ its performance.
assessing
What are common metrics used in fitness functions for trading strategies?
Common metrics include Sharpe ratio, maximum drawdown, and return on investment (ROI).
Which fitness function metric measures risk-adjusted return?
Sharpe ratio
Multiple Choice: Which of the following is NOT a fitness function metric? A) Sharpe ratio B) Maximum drawdown C) Market capitalization D) Return on Investment
C) Market capitalization
What does maximum drawdown measure in the context of trading strategies?
Maximum drawdown measures the largest drop from a peak to a trough in the value of a trading strategy.
True or False: Fitness functions can only be used for backtesting trading strategies.
False, they can also be used in live trading to evaluate performance.
How does a genetic algorithm utilize fitness functions in trading?
Genetic algorithms use fitness functions to select and evolve the best trading strategies over generations.
Fill in the blank: A fitness function can be customized to reflect specific __________ of a trader’s strategy.
goals
What is the purpose of using multiple fitness functions in evaluating a trading strategy?
Using multiple fitness functions provides a more comprehensive evaluation of the strategy’s performance across different dimensions.
Multiple Choice: Which of the following is a limitation of fitness functions? A) They can be subjective B) They provide clear metrics C) They are easy to compute D) They can improve strategy performance
A) They can be subjective
What role does overfitting play in the context of fitness functions?
Overfitting occurs when a fitness function is too closely tailored to historical data, resulting in poor performance on new data.
True or False: A fitness function can only be based on past trading performance.
False, it can also incorporate predictive metrics and market conditions.
What is a common approach to avoid overfitting when using fitness functions?
Using cross-validation techniques to test the strategy on unseen data.
Fill in the blank: A good fitness function balances __________ and risk.
reward
What is the relationship between fitness functions and algorithmic trading?
Fitness functions are essential in algorithmic trading for evaluating and optimizing automated trading strategies.
Multiple Choice: Which of the following is a key characteristic of a robust fitness function? A) High complexity B) Clarity and simplicity C) Exclusively historical data D) Subjective interpretation
B) Clarity and simplicity
What does a negative Sharpe ratio indicate?
A negative Sharpe ratio indicates that the trading strategy has underperformed compared to a risk-free asset.
True or False: The fitness function should remain constant throughout the lifespan of a trading strategy.
False, it may need to be adjusted as market conditions change.
What is the primary goal of optimizing a trading strategy with a fitness function?
The primary goal is to enhance the overall profitability and efficiency of the trading strategy.
Fill in the blank: The __________ ratio is used to understand the return per unit of risk.
Sharpe
What does ROI stand for in trading strategy evaluation?
Return on Investment
Multiple Choice: Which of the following can be a result of using an inadequate fitness function? A) Improved performance B) Misleading results C) Accurate predictions D) Enhanced strategy robustness
B) Misleading results
