Kelly Portfolio Analysis
Given a set of assets (characterized by their expected returns, volatilities, and correlations), the Kelly criterion says to choose the asset weights that maximize expected portfolio return.[more]
In the plot, is the continuously compounded portfolio return (a random variable), the axis is the standard deviation of , and the axis is its expectation. Further, the Kelly portfolio is shown in red (and its asset weights are tabulated at the top, starting with the risk-free asset weight, with leverage allowed), the user portfolio is shown in yellow, and the individual assets (including the risk-free asset) are shown as blue dots. The solid blue line is the boundary of all possible portfolios; the upper boundary is the Kelly efficient frontier. (It rolls over because the Kelly efficient frontier, unlike the Markowitz efficient frontier, is multi-period.)
In this Demonstration, a portfolio weight of 1 means 100% (shorting of assets is also allowed), a return of 0.10/yr means 10%/yr, and a volatility of 0.20 means 20%/ (which means that in 1 year the standard deviation of return is 20%/yr and that in 4 years the standard deviation of return is 10%/yr).[less]
D. G. Luenberger, Investment Science, New York: Oxford University Press, 1998 pp. 427–435.
J. L. Kelly, Jr., "A New Interpretation of Information Rate", Bell Sys. Tech. J, 35(4), 1956 pp. 917–926.