1.2 Backtesting vs. Optimization

Backtesting tests your idea. Optimization improves the portfolio allocation.

Goal

• Backtesting shows how a specific strategy would have performed in the past.
• Optimization helps you find the best strategy based on selected criteria (like max Sharpe or min volatility).

Use Case

• Use backtesting when you already have a portfolio idea and want to evaluate it.
• Use optimization when you're exploring what asset mix could give you the best results under certain constraints.

Key Input Differences

Input Setting	Backtesting	Optimization
Allocations	Yes	Yes
Use Shares instead of Allocations	Yes	No
Asset Constraints (min/max %)	No	Yes
Group Level Constraints (min/max %)	No	Yes
Rebalancing	Yes	Yes
Cash Flow Options	Yes	No
Currency Selection	Yes	No
Monte Carlo Forecast Years	Yes	No
Estimation Method	Yes	Yes