Diversification and limited information in the Kelly game

Details Diversification and limited information in the Kelly game Diversification and limited information in the Kelly game

2008-03-10

arxiv.org/abs/0803.1364v2

Physica A 387, 6151-6158 (2008)

Economy

Quantitative Finance

Portfolio Management

11 pages, 4 figures

Scientific paper

10.1016/j.physa.2008.07.007

Financial markets, with their vast range of different investment opportunities, can be seen as a system of many different simultaneous games with diverse and often unknown levels of risk and reward. We introduce generalizations to the classic Kelly investment game [Kelly (1956)] that incorporates these features, and use them to investigate the influence of diversification and limited information on Kelly-optimal portfolios. In particular we present approximate formulas for optimizing diversified portfolios and exact results for optimal investment in unknown games where the only available information is past outcomes.

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