by CI Staff
EzBacktest is a free backtesting program that shows investors the importance of diversification and helps them optimize their portfolio’s asset allocation for a desired risk and return. The program can backtest rebalancing rules, create a correlation matrix, calculate the risk and return of a portfolio using the Sharpe ratio and standard deviation, and more.
The most important factor in diversification is security selection because if the securities in a portfolio perform similarly, the portfolio is not diversified; the idea is to have securities offset each other’s volatility. For this reason, the correlation matrix is a great place to begin. A correlation matrix compares the performance of two securities over a historical period and generates a number between 1 and -1 that describes their correlation. The further the number is from 0 on the positive side, the higher the correlation, with 1 denoting identical performance, 0 indicating no correlation, and -1 being completely opposite performance.
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