Unveiling FinRL's Baseline Strategies and Key Trading Metrics for Portfolio Evaluationby@reinforcement
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Unveiling FinRL's Baseline Strategies and Key Trading Metrics for Portfolio Evaluation

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FinRL provides baseline trading strategies like passive, mean-variance, and equally weighted strategies, along with essential trading metrics such as cumulative return, Sharpe ratio, and maximum drawdown, empowering investors with insights for strategic investment decisions.
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(1) Xiao-Yang Liu, Hongyang Yang, Columbia University (xl2427,[email protected]);

(2) Jiechao Gao, University of Virginia ([email protected]);

(3) Christina Dan Wang (Corresponding Author), New York University Shanghai ([email protected]).

Abstract and 1 Introduction

2 Related Works and 2.1 Deep Reinforcement Learning Algorithms

2.2 Deep Reinforcement Learning Libraries and 2.3 Deep Reinforcement Learning in Finance

3 The Proposed FinRL Framework and 3.1 Overview of FinRL Framework

3.2 Application Layer

3.3 Agent Layer

3.4 Environment Layer

3.5 Training-Testing-Trading Pipeline

4 Hands-on Tutorials and Benchmark Performance and 4.1 Backtesting Module

4.2 Baseline Strategies and Trading Metrics

4.3 Hands-on Tutorials

4.4 Use Case I: Stock Trading

4.5 Use Case II: Portfolio Allocation and 4.6 Use Case III: Cryptocurrencies Trading

5 Ecosystem of FinRL and Conclusions, and References

4.2 Baseline Strategies and Trading Metrics

Baseline trading strategies are provided to compare with DRL strategies. Investors usually have two mutually conflicting objectives: the highest possible profits and the lowest possible risks [43]. We include three conventional strategies as baselines.

Passive trading strategy [31] is an easy and popular strategy that has the minimal trading activities. Investors simply buy and hold index ETFs [46] to replicate a broad market index or indices such as Dow Jones Industrial Average (DJIA) index and Standard & Poor’s 500 (S&P 500) index.

Mean-variance and min-variance strategy [2] both aim to achieve an optimal balance between the risks and profits. It selects a diversified portfolio with risky assets, and the risk is diversified when traded together.

Equally weighted strategy is a type of portfolio allocation method. It gives the same importance to each asset in a portfolio.

FinRL includes common metrics to evaluate trading performance:

Final portfolio value: the amount of money at the end of the trading period.

Cumulative return: subtracting the initial value from the final portfolio value, then dividing by the initial value.

Annualized return and standard deviation: geometric average return in a yearly sense, and the corresponding deviation.

Maximum drawdown ratio: the maximum observed loss from a historical peak to a trough of a portfolio, before a new peak is achieved. Maximum drawdown is an indicator of downside risk over a time period.

Sharpe ratio in (1) is the average return earned in excess of the risk-free rate per unit of volatility.

This paper is available on arxiv under CC BY 4.0 DEED license.