Kelly Criterion
Optimal bet size to maximize the long-run growth rate of capital, given edge and odds.
Details
- category: Position Sizing
- formula: f* = p/a - q/b (binary form) or f* = (μ - r) / σ² (continuous form)
- formula latex: f^* = \dfrac{\mu - r}{\sigma^2}
- limitations: Highly sensitive to estimation error in edge, Practitioners typically use fractional Kelly (¼ to ½), Assumes log-utility and i.i.d. returns
- related terms: kelly-criterion, position-sizing, fractional-kelly, log-utility
Formula
f* = p/a - q/b (binary form) or f* = (μ - r) / σ² (continuous form)