In the following figure we present the Cumulative Return series when backtesting five strategies using SPY ETF: (i) Cross-Sectional Momentum, Long Only (XSMOM-L), (ii) Cross-Sectional Momentum, Long/Short (XSMOM-LS), (iii) Time Series Momentum, Long Only (TSMOM-L), (iv) Time Series Momentum, Long/Short (TSMOM-LS), (v) Buy-and-hold (SPY).

You work for a hedge fund and present these results to an institutional investor. Her response is: I am better off with the market.

Choose the statement which best replies to this response.

Select one:

a.

No. You are better off with XSMOM-L because it has a smaller drawdown. Of course, it has smaller returns, but, as you know, the smaller the risk, the smaller the return

b.

No. You are better off with the TSMOM-LS since it looks like a straight-line guaranteeing that you will always have a stable source of income to cover your institutions liabilities

c.

Yes, but if you closely inspect the figure, TSMOM-L provides you with the same return at a lower level of drawdown

d.

Yes. You are indeed better off with the market since all the strategies I suggest provide you, more or less, with the same return

Cumulative Return XSMOM-L XSMOM-LS TSMOM-L TSMOM-LS SPY 1.5 1.0 0.5 0.0 2012 2014 2016 2018