A Dynamic Portfolio of Investment Strategies: Applying Capital Growth with Drawdown Penalties

John M. Mulvey, Mehmet Bilgili and Taha M. Vural

Chapter 50 in The Kelly Capital Growth Investment Criterion:Theory and Practice, 2011, pp 735-751 from World Scientific Publishing Co. Pte. Ltd.

Abstract: The growth optimal investment strategy has been shown to be highly effective for structured decision problems such as blackjack, sports betting, and high frequency trading. For securities markets, these strategies are more difficult to apply due to a variety of practical issues: structural changes in market behavior due to varying risk premium and related factors, transaction costs, operational constraints, and path dependent risk measures for many investors, including surplus risks for a defined-benefit pension plan. In addition, the standard three step approach for institutional money management does not allow for rapid changes in asset allocation — especially needed during highly turbulent periods. We modify the growth models to address downside protection, along with applying a portfolio of investment strategies — to improve diversification of the portfolio. Empirical results show the benefits of the concepts during normal and crash (2008) periods.

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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