Medium Term Simulations of The Full Kelly and Fractional Kelly Investment Strategies

Leonard C. MacLean, Edward O. Thorp, Yonggan Zhao and William T. Ziemba

Chapter 38 in The Kelly Capital Growth Investment Criterion:Theory and Practice, 2011, pp 543-561 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Using three simple investment situations, we simulate the behavior of the Kelly and fractional Kelly proportional betting strategies over medium term horizons using a large number of scenarios. We extend the work of Bicksler and Thorp (1973) and Ziemba and Hausch (1986) to more scenarios and decision periods. The results show:the great superiority of full Kelly and close to full Kelly strategies over longer horizons with very large gains a large fraction of the time;that the short term performance of Kelly and high fractional Kelly strategies is very risky;that there is a consistent tradeoff of growth versus security as a function of the bet sizedetermined by the various strategies; andthat no matter how favorable the investment opportunities are or how long the finite horizon is, a sequence of bad results can lead to poor final wealth outcomes, with a loss of most of the investor's initial capital.

Keywords: Kelly Criterion; Dynamic Investment Analysis; Capital Growth Theory; Sports Betting; Hedge Fund Strategies; Speculative Investing; Fortune 's Formula (search for similar items in EconPapers)
Date: 2011
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