Kelly criterion
TheoryDefinition
Mathematical formula for optimal bet sizing that maximizes long-run logarithmic utility. Kelly fraction = (edge) / (odds). Bet too much above Kelly and ruin is mathematically certain; bet too little and you forgo growth.
Most professional investors use 1/4 to 1/2 Kelly to reduce drawdowns at the cost of lower geometric mean return. "Full Kelly" is theoretically optimal but produces gut-wrenching drawdowns.
Most professional investors use 1/4 to 1/2 Kelly to reduce drawdowns at the cost of lower geometric mean return. "Full Kelly" is theoretically optimal but produces gut-wrenching drawdowns.