Historical Backtesting
Your complete guide to reading and interpreting the data generated by the StressTest.pro Backtesting Engine.
What is the Backtest Tool?
The Historical Backtester evaluates your exact asset allocation against actual chronological market data. It answers: "If you had invested this way in the past, accounting for your cashflows and rebalancing rules, what would your portfolio look like today?"
Unlike Monte Carlo (which simulates random future paths), Backtesting replays the exact historical sequence of returns. This is crucial for analyzing how your strategy behaved during specific historical regimes (e.g., The 2008 Financial Crisis).
Example: A high-conviction Portfolio vs. the S&P 500 Benchmark over a 100-month historical cycle.
1. History & Risk Metrics
CAGR (Compound Annual Growth Rate)
The smoothed annualized return of your portfolio.
CAGR measures the mean annual growth rate over a specified period longer than one year. It shows you the steady rate of return required to grow your initial investment to your final value, smoothing out the actual volatility along the way.
What looks good: A CAGR beating inflation (typically >4%) and outperforming your benchmark (e.g., S&P 500's ~10% historical average if you hold 100% equities).
Max Drawdown & Historical VaR (95%)
Your downside worst-case indicators.
Max Drawdown is the deepest valley your portfolio experienced from peak to trough. Historical Value at Risk (VaR 95%) tells you that in 95% of historical months, your portfolio's worst monthly loss did not exceed this percentage.
This metric is your ultimate 'Sleep at Night' test. Ensure you can stomach this exact percentage drop in real dollars without panic-selling.
Rolling Returns & Sharpe/Sortino Ratios
Consistency and risk-adjusted efficiency.
Rolling Returns check every 1-year window in history. Did the portfolio always make money over a 1-year period, or were there years it was deeply negative? The Sharpe and Sortino Ratios measure how much excess return you got for the volatility you endured (Sharpe > 1.0 is considered good).
2. Diversification & Concentration
Risk X-Ray Matrix
The Risk X-Ray breaks down your portfolio by style (Value vs Growth) and Market Cap (Small vs Large). It visually shows if you are accidentally over-concentrated in one type of stock (e.g. holding 5 ETFs that all secretly just own Large-Cap Tech).
Effective N & Top 10 Exposure
You might own 500 stocks via an ETF, but if 30% of your money is in Apple and Microsoft, your "Effective N" (true diversification count) is extremely low. Top 10 Exposure shows exactly how top-heavy your portfolio is.
Correlation & Exposures
The Correlation Heatmap shows if your assets move together (+1.0) or opposite (-1.0). The Exposure Charts reveal your true underlying Sector, Industry, and Regional geographic allocations.
3. Fundamentals & Quality
If your simulated portfolio contains individual stocks or fundamental-based ETFs, the engine aggregates their underlying financial health.
Piotroski F-Score & Altman Z-Score
F-Score (Max 9): Measures accounting quality and profitability trends. A score 7-9 is excellent.
Z-Score: A predictive model for bankruptcy risk. A score below 1.8 indicates the aggregate portfolio holds companies in distress. Above 3.0 is a "safe" zone.
Income & Yield on Cost
Tracks the total cash generated over history. Yield on Cost is critical for dividend investors: it measures your current annual dividend divided by your original purchase price, not the current price.
4. Momentum & Macro
Portfolio Beta vs. Benchmark
Your systematic risk exposure.
Beta measures how volatile your portfolio is compared to a benchmark (usually the S&P 500). A Beta of 1.0 means your portfolio moves exactly with the market. A Beta of 1.5 means it is 50% more volatile; a Beta of 0.5 means it is half as volatile.
What looks good: Below 1.0 if you are optimizing for capital preservation. Up to 1.5 if you are young and optimizing for aggressive growth.
Moving Averages (SMA)
Trend identification metrics.
The system analyzes Simple Moving Averages (like the 50-day and 200-day SMA). If your portfolio's current price is below the 200-day SMA, the overall aggregate trend is considered bearish or 'in a downtrend'.
Put Your Strategy to the Test
Now that you understand how to read the output, run your custom portfolio through decades of historical market data.
Run a Historical Backtest