The Kelly Criterion is the brilliant summation of a betting strategy first discovered by Information Theorist John Kelly. Kelly came up with a betting system which optimizes bankroll growth based upon known odds and a definite payout. KELLY CAPITAL GROWTH INVESTMENT CRITERION, THE: THEORY AND PRACTICE (World Scientific Handbook in Financial Economic) Illustrated Edition by Leonard C. MacLean (Editor), Edward O. Thorp (Editor), William T. Ziemba (Editor).

1. Kelly Growth Criterion Definition
2. Kelly Capital Growth Investment Criterion
3. Kelly Criterion Example
4. Kelly Capital Growth Investment Criterion

• Introduction to the Kelly Capital Growth Alumni Professor Sauder School of Business University of British Columbia Investment Strategies 49 ell o y Criterion and Samuelson’s Objections to it The Kelly capital growth criterion, which maximizes the expected log of final.
• A derivation of this appears below. Breiman (1961) showed that the Kelly capital growth criterion had two long run properties. First, it maximizes the asymptotic long run growth rate. Secondly, it minimizes the time to achieve asymptotically large investment goals. Discussion of various aspects of expected log maximization Kelly strategies and fractional.
• (Manuscript received March 21, 1956). Rate of growth of the gambler’s capital is equal to the rate of transmission of. (such as radar), detectors have been designed by the criterion of maximum transmission rate or, what is the same thing, minimum equivocation.

The Kelly Criterion is a scientific gambling method using a formula for bet sizing that mathematically calculates the proper position size for placing a bet based on the odds. The Kelly bet size is calculated by optimizing the projected value of the wealth logarithm, which is equivalent to maximizing the expected geometric growth rate of the capital being wagered. The Kelly Criterion is a formula used to bet a preset fraction of an account. It can seem counterintuitive in real time.

The Kelly formula is : Kelly % = W – (1-W)/R where:

• Kelly % = percentage of capital to be put into a single trade.
• W = Historical winning percentage of a trading system.
• R = Historical Average Win/Loss ratio.

Kelly Growth Criterion Definition

Here are the statistics traders need to calculate the Kelly Criterion:

1. You can use the data from your trading records or backtesting data for your system for calculating the Kelly Criterion.
2. Your system’s winning probability is your “W”.
3. Your system’s win/loss ratio is your “R”.
4. These numbers are the input into Kelly’s equation above for calculating bet size.
5. The Kelly percentage is what the equation returns.

Kelly Capital Growth Investment Criterion

For an even money bet, the Kelly criterion computes the wager size percentage by multiplying the percent chance to win by two, then subtracting one. So, for a bet with a 70% chance to win (or 0.7 probability), doubling 0.7 equates 1.4, from which you subtract 1, leaving 0.4 as your optimal wager size: 40% of available funds. – Wikipedia

This book is the definitive treatment of 'Fortune's Formula,' also described as 'The Kelly Criterion', used by gamblers and investors alike to determine the optimal size of a series of bets.

This volume provides the definitive treatment of fortune’s formula or the Kelly capital growth criterion as it is often called. The strategy is to maximize long run wealth of the investor by maximizing the period by period expected utility of wealth with a logarithmic utility function. Mathematical theorems show that only the log utility function maximizes asymptotic long run wealth and minimizes the expected time to arbitrary large goals. In general, the strategy is risky in the short term but as the number of bets increase, the Kelly bettor’s wealth tends to be much larger than those with essentially different strategies. So most of the time, the Kelly bettor will have much more wealth than these other bettors but the Kelly strategy can lead to considerable losses a small percent of the time. There are ways to reduce this risk at the cost of lower expected final wealth using fractional Kelly strategies that blend the Kelly suggested wager with cash. The various classic reprinted papers and the new ones written specifically for this volume cover various aspects of the theory and practice of dynamic investing. Good and bad properties are discussed, as are fixed-mix and volatility induced growth strategies. The relationships with utility theory and the use of these ideas by great investors are featured.

“This is a fantastic reference covering the theory and practice of the field beautifully organized and produced. I have already used it and I will refer it to my students and colleagues.”

—Professor David G Luenberger, Stanford University

“This volume provides a fascinating historical account and critical assessment of the Kelly criterion (expected logarithmic utility maximization) as a universal criterion for the tradeoff between risk and return in portfolio management and gambling.”

—George M Constantinides, Leo Melamed Professor of Finance, The University of Chicago, USA

“This book provides a comprehensive survey of research and applications on the Kelly growth optimal strategy that maximizes the expected utility of the log of final wealth…This book provides a fine coverage of these topics from original sources and recent research publications.”

Kelly Criterion Example

—Quantitative Finance

“For those who have heard of the Kelly mythos and want to explore the science behind it, this book will be an instant classic. The editors have collected all the pivotal original papers, spanning centuries and the rarely bridged gulf between theory and practice. This book is indispensable for anyone interested in Kelly’s legacy.”

Kelly Capital Growth Investment Criterion

—William Poundstone, Author of Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street

“The present handbook assembles in an impressive way the classical papers and also provides the link to modern research. It also presents important papers with a critical view towards the Kelly criterion.”

—Professor Walter Schachermayer, Faculty of Mathematics, University of Vienna