Evaluating Investment Strategies Through Historical Return-Based Backtesting: A Multi-Asset Markowitz Portfolio Case Study

DOI

10.2991/978-94-6463-748-9_38How to use a DOI?

Keywords

Return-based backtesting; Markowitz optimization; Historical performance analysis

Abstract

This paper presents a backtesting methodology centered on evaluating the long-term performance of a constant investment strategy, contrasting it with traditional risk-focused measures such as Value-at-Risk (VaR) backtesting. Instead of prioritizing downside risk validation, this framework quantifies and interprets total returns over an extended historical period, offering investors a more transparent and intuitive assessment of strategy effectiveness. The proposed method is applied to an optimized Markowitz portfolio composed of 21 representative U.S. stocks and the S&P 500 Index, resulting in a 22-asset portfolio. Monthly return data spanning from September 2004 to September 2024 is analyzed to mitigate non-Gaussian return distribution effects. The chosen strategy—maximizing the Sharpe ratio—provides a balanced view of risk-adjusted performance over two decades of historical data. Our empirical results align closely with theoretical expectations, demonstrating that the method delivers a coherent and robust performance assessment. While the approach offers greater accessibility and transparency for investors, it is not without limitations. Potential biases, the assumptions underlying historical data, and the singular focus on returns must all be carefully considered. Future advancements may incorporate more sophisticated data-driven techniques, regime-switching models, and integration of environmental, social, and governance (ESG) considerations. Ultimately, this return-based backtesting methodology serves as a complementary tool to traditional risk assessments, enabling a fuller understanding of long-term investment dynamics and potential improvements in strategic decision-making.

Copyright

© 2025 The Author(s)

Open Access

Open Access This chapter is licensed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International License (http://creativecommons.org/licenses/by-nc/4.0/), which permits any noncommercial use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

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TY  - CONF
AU  - Ruilin Yao
PY  - 2025
DA  - 2025/07/03
TI  - Evaluating Investment Strategies Through Historical Return-Based Backtesting: A Multi-Asset Markowitz Portfolio Case Study
BT  - Proceedings of the 2025 International Conference on Financial Risk and Investment Management (ICFRIM 2025)
PB  - Atlantis Press
SP  - 338
EP  - 351
SN  - 2352-5428
UR  - https://doi.org/10.2991/978-94-6463-748-9_38
DO  - 10.2991/978-94-6463-748-9_38
ID  - Yao2025
ER  -