Analysis of Kelly-optimal portfolios

Paolo Laureti, Matus Medo and Yi-Cheng Zhang

Papers from arXiv.org

Abstract: We investigate the use of Kelly's strategy in the construction of an optimal portfolio of assets. For lognormally distributed asset returns, we derive approximate analytical results for the optimal investment fractions in various settings. We show that when mean returns and volatilities of the assets are small and there is no risk-free asset, the Kelly-optimal portfolio lies on Markowitz Efficient Frontier. Since in the investigated case the Kelly approach forbids short positions and borrowing, often only a small fraction of the available assets is included in the Kelly-optimal portfolio. This phenomenon, that we call condensation, is studied analytically in various model scenarios.

Date: 2007-12, Revised 2009-04
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Citations: View citations in EconPapers (4)

Published in Quantitative Finance 10, 689-697 (2010)

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:0712.2771

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