Growth Optimal Investment Strategy: The Impact of Reallocation Frequency and Heavy Tails

Bamberg G. and Andreas Neuhierl
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Bamberg G.: Universität Augsburg, Institut für Statistik and Mathematische Wirtschaftstheorie,Augsburg, Germany

German Economic Review, 2012, vol. 13, issue 2, 228-240

Abstract: The strategy to maximize the long-term growth rate of final wealth (maximum expected log strategy, maximum geometric mean strategy, Kelly criterion) is based on probability theoretic underpinnings and has asymptotic optimality properties. This article reviews the allocation of wealth in a two-asset economy with one risky asset and a risk-free asset. It is also shown that the optimal fraction to be invested in the risky asset (i) depends on the length of the basic return period and (ii) is lower for heavy-tailed log returns than for light-tailed log returns.

Keywords: Heavy tails; Asymptotic optimality; Portfolio management (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1111/j.1468-0475.2011.00553.x

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