QUOTE(howszat @ Jul 2 2015, 11:38 PM)
Keyword: "theory".
In practice, well, it's only a small percentage of the whole "thing".
So, let's take some points in turn:
1. "probability", and all those fancy statistics are based on past events. In case one didn't know, past performance is not a guarantee of future performance. Therefore, to "calculate" future performance based on past statistics, and form a conclusion based on that is the wrong thing to do.
2. Fund performance has factors that statistics cannot take into account. a) Fund managers (as in manager persons, not fund house) can change, and the new fund managers can have different view-points and can do something very different. That can stuff you your nicely calculated standard-deviations and Sharpe ratios.
Statistics is nice and useful, and is one of the many, many, things one needs to consider.
Mortal is a such a loser ain't it... we cannot see the future; we can only see the past and present. Suxs to be such a loser right?
Not forming conclusions... merely as a guide to the best course of action. Some wise dude called it planning. I know I know... those dudes are losers too for planning so much when the probability has only a unicorn effect.
Sta-Dev and whatchamacallit ratios are running numbers. It will reflect, although there is a lag-time to see it. There is also a real phenomenon called regression to the mean. If there is no major black swan event; the chances are quite high the performance will regress to the mean.
Xuzen