The Kelly Capital Growth Investment Criterion

This volume provides the definitive treatment of fortune's formula or the Kelly capital growth criterion as it is often called. The strategy is to maximize long run wealth of the investor by maximizing the period by period expected utility of wealth with a logarithmic utility function. Mathematical theorems show that only the log utility function maximizes asymptotic long run wealth and minimizes the expected time to arbitrary large goals. In general, the strategy is risky in the short term but as the number of bets increase, the Kelly bettor's wealth tends to be much larger than those with essentially different strategies. So most of the time, the Kelly bettor will have much more wealth than these other bettors but the Kelly strategy can lead to considerable losses a small percent of the time. There are ways to reduce this risk at the cost of lower expected final wealth using fractional Kelly strategies that blend the Kelly suggested wager with cash. The various classic reprinted papers and the new ones written specifically for this volume cover various aspects of the theory and practice of dynamic investing. Good and bad properties are discussed, as are fixed-mix and volatility induced growth strategies. The relationships with utility theory and the use of these ideas by great investors are featured.boldContents:/boldbulletlistbulletboldThe Early Ideas and Contributions:/boldbulletlistbulletIntroduction to the Early Ideas and Contributions/bulletbulletExposition of a New Theory on the Measurement of Risk (translated by Louise Sommer) (D Bernoulli)/bulletbulletA New Interpretation of Information Rate (J R Kelly, Jr)/bulletbulletCriteria for Choice among Risky Ventures (H A Latané)/bulletbulletOptimal Gambling Systems for Favorable Games (L Breiman)/bulletbulletOptimal Gambling Systems for Favorable Games (E O Thorp)/bulletbulletPortfolio Choice and the Kelly Criterion (E O Thorp)/bulletbulletOptimal Investment and Consumption Strategies under Risk for a Class of Utility Functions (N H Hakansson)/bulletbulletOn Optimal Myopic Portfolio Policies, with and without Serial Correlation of Yields (N H Hakansson)/bulletbulletEvidence on the “Growth-Optimum-Model” (R Roll)/bullet/bulletlist/bulletbulletboldClassic Papers and Theories:/boldbulletlistbulletIntroduction to the Classic Papers and Theories/bulletbulletCompetitive Optimality of Logarithmic Investment (R M Bell and T M Cover)/bulletbulletA Bound on the Financial Value of Information (A R Barron and T M Cover)/bulletbulletAsymptotic Optimality and Asymptotic Equipartition Properties of Log-Optimum Investment (P H Algoet and T M Cover)/bulletbulletUniversal Portfolios (T M Cover)/bulletbulletThe Cost of Achieving the Best Portfolio in Hindsight (E Ordentlich and T M Cover)/bulletbulletOptimal Strategies for Repeated Games (M Finkelstein and R Whitley)/bulletbulletThe Effect of Errors in Means, Variances and Co-Variances on Optimal Portfolio Choice (V K Chopra and W T Ziemba)/bulletbulletTime to Wealth Goals in Capital Accumulation (L C MacLean, W T Ziemba, and Y Li)/bulletbulletSurvival and Evolutionary Stability of Rule the Kelly (I V Evstigneev, T Hens, and K R Schenk-Hoppé)/bulletbulletApplication of the Kelly Criterion to Ornstein-Uhlenbeck Processes (Y Lv and B K Meister)/bullet/bulletlist/bulletbulletboldThe Relationship of Kelly Optimization to Asset Allocation:/boldbulletlistbulletIntroduction to the Relationship of Kelly Optimization to Asset Allocation/bulletbulletSurvival and Growth with a Liability: Optimal Portfolio Strategies in Continuous Time (S Browne)/bulletbulletGrowth versus Security in Dynamic Investment Analysis (L C MacLean, W T Ziemba, and G Blazenko)/bulletbulletCapital Growth with Security (L C MacLean, R Sanegre, Y Zhao, and W T Ziemba)/bulletbullet