Subject: Re: What constitutes success?
Take that set of numbers, including the zeroes, and calculate the RMS. (square them all, sum the squares, take the square root of the sum).
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This downside deviation method is pretty similar to DDDD3 isn't it? I think DDDD3 used a fixed target.

Same idea, just a subset for simplicity.

The DDD3 uses both rolling quarter and rolling year figures, the 3 meaning a triple weight on the rolling year figures versus only single weight on the quarterly.
So this metric is basically 3/4 the same as DDD3.
I included the rolling quarter figures in the definition DDD3 to minimize emotional pain, not really to create the best portfolios--it's the longer term that really matters : )

DDDD3 is just the daily version of DDD3. The extra D is for "daily".

With daily calculation you get 252 hold period start dates per year instead of 12, but of course it's still only one year of real world results--the overlaps are so significant that it isn't really much more in the way of sample size. Going daily helps more in a backtest than when measuring the results of a real world portfolio, because in a backtest you could in theory have different picks every single day. In a real world portfolio your picks aren't changing during a hold period. (my portfolio is running a two month cycle).

All of the above are just particular instances of downside deviation, as written up by Mr Sortino. In essence, it's a measure of the probability that any one year interval of the portfolio will fail to make the return hurdle (with a squared penalty on the size of any shortfalls below the hurdle).

Side note: Being at heart a probability that something will happen in a time interval of a particular length, it can't meaningfully be annualized, since equity portfolio returns are not random walks as time frames get longer. In the general case, an options strategy might have a high probability of a given sized loss at the one month mark but a low probability at the one year interval: a slowly rising but jagged line. Annualizing the biggish monthly number would instead give you a huge annual number equating to a virtual certainty of failure, the exact wrong result.

Mr Sortino's key insight in his creation is that a positive return below your bare minimum is still a failure. If you need 8%/year to avoid eating dog food at age 80, or if you're a pension fund that needs 8%/year to make your payment commitments, then achieving only 7% every year is a true risk. But you have to remember that the threshold to choose for the calculation is NOT the number you want, it's the number you need: the number below which your portfolio has truly failed.

I picked a pretty aggressive 10% only because this is in the context of quant screens, where backtests are always way higher return than the resulting reality. So the original 10%/year minimum threshold I picked could be thought of as (say) 6%/year of actual return and 4%/year of exaggerated optimism in the backtest : )

Jim