Comment by auntienomen

4 years ago

Seriously. Full Kelly betting involves the use of significant leverage. The correct Kelly bet on the S&P index would be long 2.5x your total wealth.

6 comments

auntienomen

Reply
xiphias2  4 years ago

You are right, but with execution risk / slippage it gets closer to 2x (2x and 3x are both close to 2.5x, but 2x has been performing better in the past).

kqr  4 years ago

This result depends on assumptions about the future that would not sit easy with me.

  • xiphias2  4 years ago

    I can't tell you if democrats or republicans will win, but I'm quite confident that QE won't stop.

    • kqr  4 years ago

      And this is what makes SPY mispriced? Why do you think other investors don't share your view?

sigstoat  4 years ago

it literally can't tell you to bet more than your bankroll.

if you include margin in your bankroll, well, that's on your head.

  • smabie  4 years ago

    Yes it can. Kelly can be applied to determine optimal leverage ratios. Assuming a risk free rate of zero, that formula is expected return divided by expected variance.

    so 10% expected return and 10% expected volatility, optimal Kelly is 10x leverage.