Z-Ratio

Avarin Systems Inc

Z-Ratio

Z-Ratio

The Z-Ratio is the result of a Z Test of Statistical Significance. While the number does not identify how much better than random the trades produced from the strategy are (i.e. importance), the Z-Ratio is helpful in identifying whether the trades are significantly different (i.e. better) than trades produced randomly for the same period. The higher the Z-Ratio, the lower the probability that the trades were produced by random chance. Statisticians often use 3 critical ratios to determine statistical significance. These are:

Alpha Level	Critical Ratio
.05	1.64
.01	2.33
.001	3.09

If the Z-Ratio is greater than 2.33, then the trades can be said to be statistically significant at the alpha level of .01. This means that there is only a 1% probability that the trades were produced by random chance. If the Z-Ratio exceeds 3.09, there is only a 0.1% chance that the trades were produced by random chance. On the other hand, if the Z-Ratio were less than 1.64, most statisticians would assume the probability is too high that the trades were produced randomly, and would therefore consider the results statistically insignificant.

Note 1: A negative Z-Ratio indicates the average trade selected randomly had a higher return than the average trade produced from the strategy.

Note 2: Since a different sampling of random trades is produced for comparison each time the strategy is run, the Z-Ratio may differ slightly between runs.