Leverage

Answered
60
6
created on 2020-11-01 12:01:06

Comments (6)

Ls · 2 months ago

Actually leverage does change sharpe ratio as volatility is not linear with leverage but return is. As long as your strategy passes the stress test you are fine and the vol should be on the 'in sample' period between 8% and 12%.


Thanks.

Andrewlu · 2 months ago

Yes I know leverage does not change sharpe ratio. So my question is if I have a high sharp ratio with low volatility and I can leverage up bring the volatility up to the required range. Are we allowed to do this? Also is there any limit for the leverage?

Ls · 2 months ago

Humm - Leverage does change the sharpe ratio, try it over change the leverage and you will see. To answer your question yes you can change your leverage as per the example notebook is doing. The limits on leverage is set at individual weights as per competition details.


I hope that clarifies ! Cheers, Lionel.

Andrewlu · 2 months ago

I see. So to make it clear, there is no limit on how much leverage we can take on the portfolio level right? Because the stress test seems to have min and max leverage threshold

Ls · 2 months ago

The requirement from the competition rules is the volatility not the leverage, the min / max threshold on the stress test is on the weight of each asset and on the volatility level of the portfolio. So in theory yes there is no limit on leverage at the portfolio level, in practice you are limited both single asset weights leverage and volatility of the portfolio.


Andrewlu · 2 months ago

ok understood Thanks. Just one more follow up question. IF we treat the leverage as a input for payout just like the sample strategy. will the same leverage be used in the out of sample data when measuring the performance or it will be reset?