Calculate the optimal bet and investment under the Kelly criterion | Free template
Calculate the optimal bet and investment under the Kelly criterion is a free template that can be used to determine the proportion of capital that should be invested at every bet in order to maximize the long-term return on capital.
The Kelly criterion was developed by John Kelly and is used to maximize the geometric mean of the profit earned in games such as Blackjack, Roulette and other games as well as investments in the stock market. The mathematician Edward O. Thorp that defeated the bank in Blackjack (Beat The Dealer) and that has had a number of successful hedge funds have applied the Kelly criterion to maximize the long-term return on investments.
The Kelly criterion can be used to determine the optimal investment as a share of the capital when the gain, the loss and the probability of profit has been estimated. The person who can not appreciate these three parameters should not bet or invest because it is only profitable to bet or invest if there is an advantage.
To get an advantage for a bet on a game or on an investment in the stock market, there must be an expected positive return over the long term, taking into account the profit / loss ratio and the probability of winning. An unfavorable game or an unfavorable investment will always result in a negative Kelly because the opposite position is the most advantageous. Kelly results in bets designed to maximize the long term yield when both gains and losses are taken into account. The Kelly criterion does not propose investments of 100% unless the probability of profit is 100%.
If all bets are made in accordance with the Kelly criterion, there will be large fluctuations (high volatility) in the capital and a risk of overbets when there are assumptions that are to optimistic, many people therefore recommend investments in accordance with a half Kelly or another faction of Kelly.
01/01/2015 | Created by All-templates.biz
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