Projection cone

Also seen as: Monte Carlo projection, fan chart, percentile cone

What do the bands of a projection cone show?

The bands are percentiles of the paths, read day by day. The light band, 5–95%, holds the middle 90% of the scenarios at each future day; the darker band, 25–75%, holds the middle half; the Median line is the middle scenario, with half of the paths ending above it and half below. So one outcome in 20 lands below the light band and one in 20 above it, and the cone widens with the horizon because uncertainty compounds as days add up.

Which ways of drawing days can a projection use?

Three Method options decide how a future day is drawn from the past, each keeping a different property of the history:

• Blocks of days draws runs of consecutive days, so calm and turbulent spells stay together — a block bootstrap.
• Single days draws each day independently, keeping every day's size but shuffling their order — the classic independent bootstrap.
• Gaussian draws from a normal distribution with the history's average and volatility, which makes very large days rarer than markets produce them.

The Projection tab's guide says what each one assumes in more depth — see what each projection method assumes.

Does drawing more scenarios make a projection more accurate?

No — more Scenarios make the cone's edges steadier, not the projection truer. With few paths, the 5th and 95th percentiles rest on a handful of extreme scenarios and shift noticeably if the draw changes; with many, they settle. How wide the cone is comes from the strategy's history and the method, and does not change because more paths were drawn.

What does the Change row under a projection show?

Change is how far each percentile of the cone ends from today's value, as a percentage. The table under the chart reads the cone at the horizon, one column per percentile — P5, P25, P50, P75 and P95 — and gives each one twice: as a Value, and as a Change from the value the cone starts from. A P5 Change of −12% means that one scenario in 20 ended at least 12% below today's value; a P50 Change of +28% means the median scenario ended 28% above it. It looks forward, from today to the horizon — not back over the backtest.

How does Fincanva handle it?

• The cone starts from the last value of the backtest and runs one to five years ahead, a year being 252 trading days; the Horizon and Scenarios your plan allows are on the Projection tab's guide.
• It projects the figures the tab is showing: with costs, interest or taxes switched on under Simulation settings, it draws on the net daily returns — see simulation assumptions.
• The same request on the same backtest always returns the same cone.
• Under the chart the tab restates it: "This is not a forecast."

What does it look like in practice?

A strategy worth 100,000 today is projected three years ahead with Blocks of days and 1,000 scenarios. The Median ends at 128,000, the 25–75% band runs from 112,000 to 146,000, and the 5–95% band from 91,000 to 178,000. Read it as: half the paths built from this strategy's own past ended between 112,000 and 146,000, and one in twenty ended below 91,000. A history that happened to be kind makes a kind cone too, which is why the figure is a range of what the past allows, not an expectation.