The Kelly Strategy for Investing: Risk and Reward

Leonard C. MacLcan and William T. Zicmba

Chapter 33 in Handbook of the Fundamentals of Financial Decision Making:In 2 Parts, 2013, pp 637-681 from World Scientific Publishing Co. Pte. Ltd.

Abstract: A strategy which has been of long standing interest in investing is the Kelly strategy, where the expected logarithm of wealth is maximized. There are many attractive properties when this strategy is used over a long planning horizon. Notably, the asymptotic growth rate of wealth is optimal and the time to reach asymptotically large wealth targets is minimized. However, the risk aversion of the Kelly strategy is essentially zero and the strategy is very risky in the short term. Investors can lose most of their wealth with a string of bad outcomes. In this paper the Kelly strategy and the associated fractional strategies are considered. The advantages and disadvantages are described in general and in particular with application to a variety of market scenarios. The conclusion discusses the use of Kelly type strategies by great investors.

Keywords: Financial Decision Making; Asset Pricing; Prospect Theory; Utility Theory; Risk Aversion; Static Portfolio Theory; Stochastic Dominance; Dynamic Modeling; Dynamic Portfolio Theory; Tactical Asset Allocation; Kelly Strategy; Capital Growth (search for similar items in EconPapers)
Date: 2013
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9789814417358_0033 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9789814417358_0033 (text/html)
Ebook Access is available upon purchase.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:wschap:9789814417358_0033

Ordering information: This item can be ordered from

Access Statistics for this chapter

More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().