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Total Posts: 1
Joined: Jul 2017
Posted: 2017-07-19 01:21
Hi I'm new to the forum and I have some questions about how you would go about applying Kelly sizing to an equity portfolio.

I understand that in the limit of a small edge and if µ is small relative to σ the trading fraction according to the Kelly criterion is approximately f=return over risk free rate/variance.

Most value PMs come up with some form of ex ante expected return and variance. Would you simply use these estimates for sizing?

The position size would then just be f in percent terms? i.e if f = 5 for Stock A and f=2 for Stock B with a 100k account, one would invest .05*100k = 5k in stock A and .02*95k = 1.9k in Stock. Or would it be 5k in stock A and 2k in Stock B.

I'm skeptical to see that that the order of investments can change the dollar amounts so dramatically. If we use the former then we will never invest all of our capital. The latter may imply lots of leverage or dry powder depending on how many potential investments we can identify.

Most of my f's come along the .5-3.0 range and their sum is approximately 50, ideally I would like to deploy all of my capital or even use some leverage.

Any thoughts or papers would be much appreciated.


Total Posts: 167
Joined: Apr 2008
Posted: 2017-08-04 15:48
For multiple bets, Markowtiz mean variance may be a better way to handle it.

Train yourself to let go of everything you fear to lose- Master Yoda
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