Custom Histogram / Bucket Reports

Buckets in a Nutshell

The term bucket illustrates perfectly the process at stake:

Imagine 10 buckets that have been placed side by side. Let's assume we assign each bucket a given performance range.
Since we have 10 buckets, we will take the highest and lowest values we believe our portfolio can take and divide this range into 10 smaller ranges. We then assign each buckets a range.

Now, at the end of each sampling frequency, which is usually daily, we look at the performance of our portfolio.

Every time our portfolio falls within a bucket range, we fill the bucket. The amount used to fill the bucket must always be the same so that results are comparable.

At the end of a selected investment horizon the histogram accumulator or bucket report reveals it's full potential as it captures the portfolio's distribution.

We can then read directly the probabilities or chances of reaching a chosen performance, of falling above or below a threshold by reading the relative quantity in each bucket.

The production of Histogram Reports can actually be quite complex. Indeed in order to bin these returns, you need to know how your position or portfolio will behave.

If the position you are analyzing has a narrow distribution, you returns might all stack up into the same bucket On the other hand if you have too many bins, you will end up with a monotonous result that will be inconclusive.

This is where custom histogram / buckets come into play. Instead of following complex numerical procedures that work in most cases, the custom histogram bucket allows you to fix the number and size / range of each bucket.

Custom Histogram Buckets can zoom into results that were actually lost in the standard histogram report.

Setting Up Custom Buckets:

The Standard histogram uses advanced numerical techniques to capture most distributions.

There are times when you will need to narrow down on results. This is the purpose of Custom histogram / Bucket Report. they are ideally suited to zoom into results where standard histograms fall short. Custom Histogram Reports include two different approaches: Automatic / Manual for both normal and non/normal distributions.

The Automatic Mode uses samples to approximate the distribution. This requires a number of samples and the number of buckets

The Manual Mode must be set by the user.

The Custom Histogram or Bucket Report requires a number of buckets and a series of intervals or minimum/maximum boundaries.