Prior studies have shown how hard it is to measure a manager’s stock selection skills when value added by the manager is in a moderate range of 1.5 to 2 per cent a year. Simulation techniques can be used to generate various levels of value added by market timers switching between the S&P 500 and U.S. Treasury bills. Their market timing abilities can then be measured by various parametric and nonparametric tests.

Most common existing tests to detect statistically significant ability equal to about 2 per cent excess return per year require time periods well beyond human life expectancy. To identify significant market timing ability within a reasonable period—say, four years—these tests would require a manager to return at least 1 per cent a month over the S&P 500 benchmark.