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The Kelly Strategy for Investing: Risk and Reward

In: HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part II

Author

Listed:
  • Leonard C. MacLcan
  • William T. Zicmba

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.

Suggested Citation

  • Leonard C. MacLcan & William T. Zicmba, 2013. "The Kelly Strategy for Investing: Risk and Reward," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part II, chapter 33, pages 637-681, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814417358_0033
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