Analysis of Kelly-optimal portfolios
Abstract
We investigate the use of Kelly's strategy in the construction of an optimal portfolio of assets. For lognormally distributed asset returns, we derive approximate analytical results for the optimal investment fractions in various settings. We show that when mean returns and volatilities of the assets are small and there is no risk-free asset, the Kelly-optimal portfolio lies on Markowitz Efficient Frontier. Since in the investigated case the Kelly approach forbids short positions and borrowing, often only a small fraction of the available assets is included in the Kelly-optimal portfolio. This phenomenon, that we call condensation, is studied analytically in various model scenarios.
Keywords
Cite
@article{arxiv.0712.2771,
title = {Analysis of Kelly-optimal portfolios},
author = {Paolo Laureti and Matus Medo and Yi-Cheng Zhang},
journal= {arXiv preprint arXiv:0712.2771},
year = {2011}
}
Comments
15 pages, 7 figures; extended list of references and some minor modifications