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Medium Term Simulations of The Full Kelly and Fractional Kelly Investment Strategies

In: THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE

Author

Listed:
  • Leonard C. MacLean
  • Edward O. Thorp
  • Yonggan Zhao
  • William T. Ziemba

Abstract

Using three simple investment situations, we simulate the behavior of the Kelly and fractional Kelly proportional betting strategies over medium term horizons using a large number of scenarios. We extend the work of Bicksler and Thorp (1973) and Ziemba and Hausch (1986) to more scenarios and decision periods. The results show:the great superiority of full Kelly and close to full Kelly strategies over longer horizons with very large gains a large fraction of the time;that the short term performance of Kelly and high fractional Kelly strategies is very risky;that there is a consistent tradeoff of growth versus security as a function of the bet sizedetermined by the various strategies; andthat no matter how favorable the investment opportunities are or how long the finite horizon is, a sequence of bad results can lead to poor final wealth outcomes, with a loss of most of the investor's initial capital.

Suggested Citation

  • Leonard C. MacLean & Edward O. Thorp & Yonggan Zhao & William T. Ziemba, 2011. "Medium Term Simulations of The Full Kelly and Fractional Kelly Investment Strategies," World Scientific Book Chapters, in: Leonard C MacLean & Edward O Thorp & William T Ziemba (ed.), THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 38, pages 543-561, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814293501_0038
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    Cited by:

    1. Haluk Yener & Thanasis Stengos & M. Ege Yazgan, 2017. "Analysis of the seeds of the debt crisis in Europe," The European Journal of Finance, Taylor & Francis Journals, vol. 23(15), pages 1589-1610, December.
    2. Haluk Yener & Fuat Can Beylunioglu, 2017. "Outperforming A Stochastic Benchmark Under Borrowing And Rectangular Constraints," Working Papers 1701, The Center for Financial Studies (CEFIS), Istanbul Bilgi University.
    3. Matej Uhr'in & Gustav v{S}ourek & Ondv{r}ej Hub'av{c}ek & Filip v{Z}elezn'y, 2021. "Optimal sports betting strategies in practice: an experimental review," Papers 2107.08827, arXiv.org.
    4. Hubáček, Ondřej & Šír, Gustav, 2023. "Beating the market with a bad predictive model," International Journal of Forecasting, Elsevier, vol. 39(2), pages 691-719.

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