Risk and Return Characteristics

Mean reversion strategies profit when prices deviate from a statistical average. These strategies assume prices revert to a mean over time. This assumption shapes their return profile. Mean reversion

Mean reversion strategies often exhibit negative skewness. This means they produce many small gains and few large losses. The distribution of returns has a long left tail. This characteristic can surp

Mean reversion strategies show fat tails in their return distributions. A fat tail means more frequent extreme events than a normal distribution predicts. This results in more large gains and large lo

Maximum Drawdown (MDD) quantifies the largest peak-to-trough decline in an investment's value. It measures downside risk. MDD represents the worst historical loss an investor would have endured. Calcu

The Sharpe Ratio measures risk-adjusted return. It quantifies the excess return per unit of total risk (standard deviation). A higher Sharpe Ratio indicates better performance. However, context matter

The Sortino Ratio measures risk-adjusted return. It focuses solely on downside deviation. This differs from the Sharpe Ratio, which uses total standard deviation. Traders prefer the Sortino Ratio for

The Calmar Ratio measures return on maximum drawdown. It provides a more robust risk-adjusted return metric than the Sharpe Ratio for mean reversion strategies. Mean reversion often exhibits non-norma

Mean reversion strategies face a basic capacity problem. The market absorbs only so much capital before diminishing returns reduce profit. Increased trading volume from a single strategy impacts price

Mean reversion strategies exhibit distinct return correlations with other common trading styles. These correlations impact portfolio diversification and overall risk management. Traders must quantify

Mean reversion strategies offer distinct risk-return profiles. Incorporating them into a multi-strategy portfolio enhances diversification. This section explores how mean reversion strategies interact