From this distribution chart, you see that over the history of the HML factor, the excess returns of the factor in any 60-month period is usually between 0 percent to 9 percent annualized and the distribution of returns is positively skewed. However, there have been periods where the annualized excess returns of the factor have been negative and a few quite negative.
Quantitative investing strategies are built on testing a strategy over a historical period. The performance of the strategy is typically quantified by the return during the period, the volatility of the return stream, and a risk-adjusted return of the strategy. While this information is relevant, it may be biased by the starting and ending dates used in the analysis. As such, adding a distribution of returns helps an investor frame an appropriate expectation of the performance of the strategy, particularly for out of sample returns.
Kent Huang is chief risk officer at Mount Lucas Management.