Given a text T, and several options, according to the question posed in the text T to choose the most appropriate option from the options as the answer, please directly output the most appropriate option, do not need to output the explanation.

Kata Rom is an equity analyst working for Gimingham Wealth Partners (GWP), a large investment advisory company. Rom meets with Goran Galic, a Canadian private wealth client, to explain investment strategies used by GWP to generate portfolio alpha for its clients.Rom states that GWP is recognized in the Canadian investment industry as a leading factor-based value portfolio manager and describes how GWP creates relevant investment strategies and explains GWP’s backtesting process. Rom notes the following:Statement 1: Using historical data, backtesting approximates a real-life investment process to illustrate the risk–return tradeoff of a particular proposed investment strategy.Statement 2: Backtesting is used almost exclusively by quantitative investment managers and rarely by fundamental investment managers, who are more concerned with information such as forward estimates of company earnings, macroeconomic factors, and intrinsic values.Galic, who is 62 years old, decides to allocate C$2 million (representing 10% of his net worth) to an account with GWP and stipulates that portfolio assets be restricted exclusively to domestic securities. Although GWP has not backtested its strategies with such a restriction, it has backtested its strategies using a global index that includes domestic securities. Rom shows the following risk measures to Galic for three factor portfolios.
| Exhibit 1Downside Risk Measures for Model Factors |
| Risk Measure | Factor 1 | Factor 2 | Factor 3 |
| Value at risk(VaR)(95%) | (6.49%) | (0.77%) | (2.40%) |
| Conditional VaR(CVaR) (95%) | (15.73%) | (4.21%) | (3.24%) |
| Maximum drawdown | 35.10% | 38.83% | 45.98% |


Galic asks Rom, “What happens if the future is different from the past?” Rom gives the following replies:Statement 3: Although backtesting can offer some comfort, you are correct that it does have a weakness: Backtesting generally does not capture the dynamic nature of financial markets and in particular may not capture extreme downside risk.Statement 4: As a result, we have captured extreme downside risk and the dynamic nature of financial markets by using the Value-at-Risk and Conditional Value-at- Risk measures.In an effort to make Galic fully aware of the risks inherent in GWP’s strategies, Rom describes a recent study that investigated the return distributions of value and momentum factors that GWP uses to construct portfolios. The study found that these distributions were non-normal based on their negative skewness, excess kurtosis, and tail dependence. Rom indicated that investment strategies based on this type of data are prone to significantly higher downside risk. Rom informs Galic that GWP also uses a technique commonly referred to as scenario analysis to examine how strategies perform in different structural regimes. Exhibit 2 compares the performance of two of GWP’s factor allocation strategies in different regimes:
| Exhibit 2Scenario Analysis Using the Sharpe Ratio |
| Strategy/Regime | HighVolatility | LowVolatility | Recession | Non-recession |
| Strategy I | 0.88 | 0.64 | 0.20 | 1.00 |
| Strategy II | 1.56 | 1.60 | 1.76 | 1.52 |


Galic is surprised to see that some of the backtest results are unfavorable. He asks,“Why has GWP not considered strategies that perform better in backtesting?” Galic recently met with Fastlane Wealth Managers, who showed much better performance results. The portfolio manager at Fastlane told Galic that the company selects the top-performing strategies after performing thousands of backtests.
Which key parameter needs to be changed for a new backtest that includes Galic’s restrictions?
Option A:Start and end dates.
Option B:Consideration of transaction costs.
Option C:Investment universe.

Answer: C