Investors who use quantitative forecasts to inform their trading have a two-part problem. First, they must come up with market forecasts on a regular basis. Second, they must devise a trading strategy based on the forecasts. We think this second step is crucial and we spend a lot of time trying to devise the optimal use of the forecasts, which for us means getting the best tradeoff between risk and return from an investment strategy.
One way to explore forecasts and outcomes is to create a scatter plot with forecasts in the horizontal axis and “actuals” in the vertical access. Here is an example of a scatter plot … Click here to download the full document