Dear Sir,
I was running a simulation and I found that the cumulative returns for the strategy is positive despite all the sectors are having negative cumulative returns except one.
The only positive sector has only small weight.
How is this possible?
Thanks
The positive common return is being driven by the contribution from the negative exposure to the volatility factor. The cumulative return attributed to the strategy's volatility exposure is + 30%, which outweighs all the other negative contributions from the other factors. There is also a positive specific return which is return unexplained by your algorithm's risk exposures.
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