Hacker News Reader

Comment by cyberlab | Hacker News Reader

Naval Ravikant has a small post about this here: https://nav.al/kelly-criterion

I first heard about it from him. He summarizes it as follows:

> Naval: The Kelly criterion is a popularized mathematical formulation of a simple concept. The simple concept is: Don’t risk everything. Stay out of jail. Don’t bet everything on one big gamble. Be careful how much you bet each time, so you don’t lose the whole kitty.

View on HN

Lol. He must have never met anyone who has bet full Kelly.

Seriously. Full Kelly betting involves the use of significant leverage. The correct Kelly bet on the S&P index would be long 2.5x your total wealth.

This result depends on assumptions about the future that would not sit easy with me.

I can't tell you if democrats or republicans will win, but I'm quite confident that QE won't stop.

And this is what makes SPY mispriced? Why do you think other investors don't share your view?

it literally can't tell you to bet more than your bankroll.

if you include margin in your bankroll, well, that's on your head.

Yes it can. Kelly can be applied to determine optimal leverage ratios. Assuming a risk free rate of zero, that formula is expected return divided by expected variance.

so 10% expected return and 10% expected volatility, optimal Kelly is 10x leverage.

You are right, but with execution risk / slippage it gets closer to 2x (2x and 3x are both close to 2.5x, but 2x has been performing better in the past).

Reply on news.ycombinator.com