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INVESTMENT CRITERION
THE _ _ _ _ _ _ _ __
THEORY and PRACTICE
KELLY CAPITAL GROWTH

World Scientific Handbook in Financial Economic Series
(ISSN: 2010-1732)
Series Editor: William T. Ziemba

Professor Emeritus, University of British Columbia, Canada
Visiting Professor, Oxford University and University of Reading, UK
Advisory Editors: Robert C. Merton

Kenneth J. Arrow Harvard University, USA
Stewart C. Myers
Stanford University, USA

George C. Constantinides Massachusetts institute of Technology,
University of Chicago, USA USA
The Kelly Capital Growth Investment Criterion Downloaded from www.worldscientific.com
Espen Eckbo Paul A. Samuelson

Dartmouth College, USA Massachusetts institute of Technology,
Harry M. Markowitz USA
University of California, USA William F. Sharpe
Stanford University, USA
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Vol. 1 Stochastic Optimization Models in Finance (2006 Edition)
edited by William T Ziemba & Raymond G. Vickson
Vol. 2 Efficiency of Racetrack Betting Markets (2008 Edition)

edited by Donald B. Hausch, Victor S. Y. Lo & William T Ziemba
Vol. 3 The Kelly Capital Growth Investment Criterion: Theory and Practice
edited by Leonard C. MacLean, Edward 0. Thorp & William T Ziemba
World Scientific Handbook in Financial Economic Series - Vol. 3
THEORY and PRACTICE

_ _ _ THE _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __
KELLY CAPITAL GROWTH

INVESTMENT CRITERION
Editors
leonard C Maclean
Dalhousie University, USA
Edward 0 Thorp
University of California, Irvine, USA
William T Ziemba
Mathematical Institute, Oxford University, UK and University of British Columbia, Canada
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Library of Congress Cataloging-in-Publication Data

The Kelly capital growth investment criterion : theory and practice I edited by Leonard C. MacLean,
Edward O. T horp , Willi am T. Ziemba.
p. em. -- (World Scientific handboo k in financial economic series, 2010- 1732 ; 3)

Incl udes bibliograpW cal references.
ISBN-13: 978-98 14293495
ISBN-lO : 98 14293490
ISBN-13: 978-98 14293501
ISBN-lO : 98 142935 04
1. Investments--Mathematical models. 2. Portfolio management--Ma thematical models.
1. MacLean, L. C. (Leonard C.) II . Thorp , Edward O. III. Ziemba, W. T.
HG45 15.2.K45201O
332.63'2042--dc22
2010044902
British Library Cataloguing-in-Publication Data

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Printed in Singapore.
To my wife Gwenolyn, for her patience and encouragement, and Dalhousie

University for its constant support over many years
Leonard C. MacLean
To Vivian, with whom I've shared "the long run"

Edward O. Thorp
To Sandra for companionship, help, patience, and understanding over a long time
and to the memory of Kelly criterion pioneeers, John L. Kelly, Henry A. Latane,
Leo Breiman, and Kelly critic Paul A. Samuelson
William T. Ziemba
This page is intentionally left blank

VII
Contents
Preface xv
List of Contributors XVll

Acknow ledgments XXI
Pictures xxv
Part I: The Early Ideas and Contributions
1. Introduction to the Early Ideas and Contributions 3
2. Exposition of a New Theory on the Measurement of Risk 11

(translated by Louise Sommer)
D. Bernoulli
Econometrica, 22 , 23-36 (1954)
3. A New Interpretation of Information Rate 25

J. R. Kelly, Jr.
B ell System Technical Journal, 35, 917- 926 (1956)
4. Criteria for Choice among Risky Ventures 35

H. A. Latane
Journal of Political Economy, 67, 144- 155 (1959)
5. Optimal Gambling Systems for Favorable Games 47

L. Breiman
Proceedings of the 4th Berkeley Symposium on
Mathematical Statistics and Probability, 1, 63- 68 (1961)
viii Contents
6. Optimal Gambling Systems for Favorable Games 61

E. O. Thorp
Review of the International Statistical Institute, 37(3) ,
273-293 (1969)
7. Portfolio Choice and the Kelly Criterion 81

E. O. Thorp
Proceedings of the Business and Economics Section of
the American Statistical Association, 215- 224 (1971)

8. Optimal Investment and Consumption Strategies under Risk 91

for a Class of Utility Functions
N. H. Hakansson
Econometrica, 38, 587- 607 (1970)
9. On Optimal Myopic Portfolio Policies, with and without 113

Serial Correlation of Yields
N. H. Hakansson
Journal of Business, 44, 324- 334 (1971)
10. Evidence on the "Growth-Optimum-Model" 125

R. Roll
The Journal of Finance, 28(3) , 551- 566 (1973)
Part II: Classic Papers and Theories
11. Introduction to the Classic Papers and Theories 143
12. Competitive Optimality of Logarithmic Investment 147

R. M. Bell and T . M. Cover
Mathematics of Operations Research, 5(2) ,
161- 166 (1980)
13. A Bound on the Financial Value of Information 153

A. R. Barron and T. M. Cover
IEEE Transactions of Information Theory, 34(5) ,
1097- 1100 (1988)
Contents IX
14. Asymptotic Optimality and Asymptotic Equipartition 157

Properties of Log-Optimum Investment
P. H. Algoet and T. M. Cover

Annals of Probability, 16(2), 876- 898 (1988)
15. Universal Portfolios 181
T . M. Cover
Mathematical Finance, 1(1), 1- 29 (1991)

16. T he Cost of Achieving the Best Portfolio in Hindsight 211
E. Ordentlich and T. M. Cover

Mathematics of Operations Research, 23(4) ,
960- 982 (1998)
17. Optimal Strategies for Repeated Games 235
M. Finkelstein and R. Whit ley

Advanced Applied Pro bability, 13, 415- 428 (1981)
18. The Effect of Errors in Means, Variances and Co-Variances 249

on Optimal Portfolio Choice
V. K. Chopra and W. T. Ziemba

Journal of Portfolio Management, 19, 6- 11 (1993)
19. Time to Wealth Goals in Capital Accumulation 259
L. C. MacLean, W . T . Ziemba, and Y. Li

Quantitative Finance, 5(4), 343- 355 (2005)
20 . Survival and evolutionary Stability of Rule the Kelly 273
1. V. Evstigneev, T. Hens, and K. R. Schenk-Hoppe

(2010)
x Contents
21. Application of the Kelly Criterion to Ornstein-Uhlenbeck 285

Processes
Y. Lv and B. K. Meister
Lecture Notes of the Institute for Computer Sciences, 4,
1051- 1062 (2009)
P art III: The R elationship of Kelly Optimization to

Asset A llocation
22. Introduction to the Relationship of Kelly Optimization to 301

Asset Allocation
23. Survival and Growth with a Liability: Optimal Portfolio 307

Strategies in Continuous Time
S. Browne
Mathematics of Operations Research, 22(2) , 468- 493
(1997)
24 . Growth versus Security in Dynamic Investment Analysis 331

L. C. MacLean, W. T. Ziemba, and G. Blazenko
Management Science, 38(11), 1562-1585 (1992)
25 . Capital Growth with Security 355

L. C. MacLean, R. Sanegre, Y. Zhao, and W. T . Ziemba
Journal of Economic Dynamics and Control, 28(4),
937-954 (2004)
26. Risk-Constrained Dynamic Active Portfolio Management 373

S. Browne
Management Science, 46(9), 1188-1199 (2000)
27. Fractional Kelly Strategies for Benchmark Asset Management 385

M. Davis and S. Lleo (2010)
28 . A Benchmark Approach to Investing and Pricing 409
E. Platen (2010)
Contents Xl
29. Growing Wealth with Fixed-Mix Strategies 427
M. A. H. Dempster, 1. V. Evstigneev, and

K. R. Schenk-Hoppe (2010)
P art I V : Critics and A ssessing the G ood and Bad

P roperties of K elly
30. Introduction to the Good and Bad Properties of Kelly 459

31. Lifetime Portfolio Selection by Dynamic Stochastic 465

Programming
P. A. Samuelson
Review of Economics and Statistics, 51, 239- 246 (1969)
32. Models of Optimal Capital Accumulation and Portfolio 473

Selection and the Captial Growth Criterion
W . T. Ziemba and R. G. Vickson (2010)
33. The "Fallacy" of Maximizing the Geometric Mean in Long 487

Sequences of Investing or Gambling
P. A. Samuelson
Proceedings National Academy of Science, 68(10),
2493- 2496 (1971)
34. Why We Should Not Make Mean Log of Wealth Big Though 491
Years to Act Are Long
P. A. Samuelson
Journal of Banking and Finance, 3, 305- 307 (1979)
35. Investment for the Long Run: New Evidence for an Old Rule 495
H. M. Markowitz
Journal of Finance, 31(5), 1273- 1286 (1976)
36. Understanding the Kelly Criterion 509

E. O. Thorp
Wilmott, May and September (2008)
Xli Contents
37. Concave Utilities Are Distinguished by Their 525

Optimal Strategies
E. O. Thorp and R. Whitley

Colloquia Mathematica Societatis Janos Bolyai,
813-830 (1972)
38. Medium Term Simulations of the Full Kelly and 543

Fractional Kelly Strategies Investment
L. C. MacLean, E. O. Thorp , Y. Zhao, and

W. T. Ziemba (2010)
39. Good and Bad Kelly Properties of the Kelly Criterion 563
L. C. MacLean, E. O. Thorp, and W. T. Ziemba (2010)
Part V: Utility Foundations
40. Introduction to the Utility Foundations of Kelly 575
41. Capital Growth Theory 577
N. H. Hakansson and W. T. Ziemba

In R. A. J arrow , V. Maksimovic, and W. T. Ziemba
(Eds.) , Finance, Handbooks in OR fj MS, Volume 9,
65- 86. North Holland (1995)
42. A Preference Foundation for Log Mean-Variance Criteria in 599

Portfolio Choice Problems
D. G. Luenberger
Journal of Economic Dynamics and Control, 17,
88- 906 (1993)
43 . Portfolio Choice with Endogenous Utility: A Large 619

Deviations Approach
M. Stutzer
Journal of Econometrics, 116, 365-386 (2003)
Contents Xlll
44. On Growth-Optimality vs. Security against Underperformance 641
M. Stutzer (2010)
P art VI: Evidence of the Use of K elly Type Strat egies by the
Great Invest or s a nd Others
45 . Introduction to the Evidence of the Use of Kelly Type 657

Strategies by the Great Investors and Others

46 . Efficiency of the Market for Racetrack Betting 663
D. B. Hausch, W. T. Ziemba, and M. E. Rubinstein

Management Science, 27, 1435- 1452 (1981)
47. Transactions Costs, Extent of Inefficiencies, Entries and 681

Multiple Wagers in a Racetrack Betting Model
D. B. Hausch and W. T. Ziemba

Management Science, 31, 381- 394 (1985)
48 . The Dr . Z Betting System in England 695
W. T. Ziemba and D. B. Hausch

In D. B. Hausch, V. Lo, and W. T . Ziemba (Eds.),
Efficiency of Racetrack Betting Markets, 567- 574.
World Scientific (2008)
49. A Half Century of Returns on Levered and Unlevered Portfolios 703

of Stocks, Bonds and Bills, with and without Small Stocks
R. R. Grauer and N. H. Hakansson

Journal of Business, 592, 287- 318 (1986)
50. A Dynamic Portfolio of Investment Strategies: Applying 735

Capital Growth with Drawdown Penalties
J. M. Mulvey, M. Bilgili, and T. M. Vural (2010)

XIV Contents
51. Intertemporal Surplus Management 753
M. Rudolf and W. T. Ziemba

Journal of Economic Dynamics and Control, 28,
975-990 (2004)
52. The Symmetric Downside-Risk Sharpe Ratio and the 769

Evaluation of Great Investors and Speculators
W. T. Ziemba
Journal of Portfolio Management, 32(1), 108- 122
(2005)
53. Postscript: The Renaissance Medallion Fund 785
R. E. S. Ziemba and W. T. Ziemba

In Scenarios for Risk Management and Global
Investment Strategies, 295- 298. Wiley (2007)
54. The Kelly Criterion in Blackjack Sports Betting and the 789
Stock Market
E . O. Thorp
In S. A. Zenios and W. T. Ziemba (Eds.),
Handbook of Asset and Liability Management,
Volume 1, 387- 428. Elsevier (2006)
Bibliography 833
Author Index 839
Subject Index 843

xv
Preface
The modern development of the Kelly, or growth optimal, approach to allocating invest-
ments began with J .L. Kelly's seminal 1956 paper , over two hundred years after Daniel
Bernoulli's 1738 introduction to the notion of logarithmic utility. Kelly's paper was fol-
lowed by Latane's (1959) intuitive economic analysis and theoretical advances by Breiman
(1960, 1961). Breiman showed that the Kelly maximization of expected utility with a log-
arithmic utility function also maximized the long run asymptotic growth of wealth while
minimizing the expected time to reach arbitrarily large goals. Thorp (1962, 1966, 1969,
1971) pioneered the application of the Kelly criterion to actual gambling and investment.
Ziemba and Vickson (1975) surveyed the literature presenting key papers, introductions
and problems up to that time; for an update, see Ziemba and Vickson (2006). Algoet
and Cover (1988) generalized the Breiman results to wider classes of assets and arbitrary
ergodic market processes. MacLean, Ziemba and Blazenko (1992) show applications to
a wide variety of sports and gambling events following Hausch, Ziemba and Rubinstein 's
(1981) application to racetrack betting.
Thorp (1960) suggested the term Fort'une '8 Formula which later became the title of William
Poundstone's 2005 book. This was in an abstract for a talk Thorp gave to the American
Mathematical Society in January 1961, presenting his blackjack card counting discovery
and his use of the Kelly approach to size bets in favorable situations. The term Kelly
criterion appears to date from Thorp (1966) and is used in Thorp (1969)
Over the years both theory and practice have developed prolifically. The theory has been
extended to managing portfolios of investments, results have been obtained for a broad
range of distributional assumptions, the simultaneous management of assets and liabilities
has been elaborated upon, and the various properties, advantages and disadvantages have
been clarified.
We now have a fuller understanding of the tradeoff between risk and reward for fractional
Kelly versus full Kelly and for Kelly subject to minimizing the underperformance of a
benchmark or specified desired wealth path.
The theory has also benefitted from the practical experience of gamblers, traders, hedge
v
XVI Preface
fund managers and investors, especially from some of the greatest investors.
In this volume we present a selection of many of the most important papers from the now
vast and growing literature on the subject. While we could not publish all the important
papers, we feel that the main results appear here.
The volume is organized into six sections that cover the early ideas and contributions,
classic papers and theories, relations to asset allocation including optimization with with-
drawals, fractional Kelly wagering and its relations to benchmarks, assessing the good and
bad properties of Kelly wagering, utility foundations and the use of Kelly type strategies
by various investors including the greatest investors.
We thank our authors for their contributions, those who helped us with the editing and
production especially Sandra Schwartz and our publisher, World Scientific, for their pro-
duction and promotion of this volume. Special thanks go to Tom Cover for many helpful
comments on earlier versions of the introductions and to Bryan Fitzgerald for valuable
data.
Leonard C. MacLean
Edward O. Thorp
William T. Ziemba
March 2010
xvii
List of Contributors
Contributors Chapters
Andrew R. Barron 13
Department of Statistics, Yale University,
Connecticut, USA
Bernhard K. Meister 21
Department of Physics,
Renmin University of China, China
Daniel Bernoulli 2
University of Basel, Switzerland
David G. Luenberger 42
Stanford University, Stanford, USA
Donald B. Hausch 46, 47, 48

School of Business, University of Wisconsin,
Wisconsin, USA
Eckhard Platen 28
School of Finance and Economics and
Department of Mathematical Sciences,
University of Technology, Sydney, Australia
Edward O. Thorp 6,7,36,37,38,39,

Edward O. Thorp and Associates, 54
Newport Beach, CA, USA
Erik Ordentlich 16
Hewlett Packard Labs, Palo Alto, California, USA
George Blazenko 24
School of Business Administration,
Simon Fraser University, British Columbia, Canada
XV111 List a/Contributors
Harry M. Markowitz 35
IBM Thomas J. Watson Research Center,
Yorktown Heights, New York, USA
Henry A. Latane 4
Chapel Hill, University of North Carolina, USA
Igor V. Evstigneev 20,29

Economics Department, School of Social Sciences,

University of Manchester, UK
John L. Kelly Jr. 3

B ell Labs, New Jersey, USA
John M. Mulvey 50
Princeton University, New Jersey, USA
Klaus R. Schenk-Hoppe 20,29

Leeds University Business School and
School of Mathematics,
University of Leeds, UK
Leo Breiman 5
University of California, Los Angeles, USA
Leonard C. MacLean 19, 24, 25, 38, 39

School of Business Administration,
Dalhousie University, Halifax, Canada
Mark Davis 27
Department of Mathematics ,
Imperial College London, London, UK
Mark Finkelstein 17
University of California, Irvin e, USA
Markus Rudolf 51
WHU-Otto Beisheim Graduate School of Management,
Dresdner Bank Chair of Finance, Germany
Mehmet Bilgili 50
Alliance B ernstein, Equity Trading, New York, USA
List of Contributors xix
Michael Stutzer 43, 44

Burridge Center for Securities Analysis and Valuation,
Leeds School of Business, University of Colorado,
Boulder, USA
Nils H. Hakansson 8,9,41,49

Walter A. Haas School of Business,

University of California, B erkeley, USA
Paul A. Samuelson 31, 33, 34

Department of Economics,
Massachusetts Institute of Technology, Cambridge, USA
Paul H. Algoet 14
Boston University, Massachusetts, USA
Rafael Sanegre 25
University of British Columbia, Canada
Rachel E. S. Ziemba 53
Roubini Global Economics, London, UK
Raymond G. Vickson 32
Professor Emeritus,
University of Waterloo, Canada
Robert M. Bell 12
Robert R. Grauer 49
Simon Fraser University, Canada
Robert Whitley 17,37

University of California, Irvin e, USA
Richard Roll 10
Anderson School of Management,
UCLA, Los Angeles, USA
Sebastien Lleo 27
Department of Mathematics,
Imperial College London, London, UK
xx List a/Contributors
Sid Browne 23,26

Graduate School of Business, Columbia University,
New York, USA
Taha M. Vural 50
Princeton University, New Jersey, USA
Thomas M. Cover 12, 13, 14, 15, 16

Department of Statistics and Electrical Engineering,

Thorsten Hens 20
University of Zurich, Switzerland
Vijay K. Chopra 18
Frank Russell Company
William T. Ziemba 18, 19, 24, 25, 32,

Professor Emeritus, 38, 39, 41, 46, 47,
University of British Columbia, Canada 48, 51, 52
Visiting Professor,
Oxford University and University of Reading, UK
Yingdong Lv 21
Department of Physics,
Renmin University of China, China
Yonggan Zhao 25,28

School of Business, Dallhousie University,
Halifax, Canada
Yuming Li 19
School of Business, California State University,
Fullerton, USA
XXI
Acknowledgements
We thank the following publishers and authors for permission to reproduce the
articles listed below.

Advanced Applied Probability

Finkelstein, M. and R. Whitley (1981). Optimal strategies for repeated
games. 13, 415- 428.
Annals of Probability
Algoet, P. H. and T. M. Cover (1988) . Asymptotic optimality and asymp-
totic equipartition properties of log-optimum investment. 16(2), 876- 898.
Bell System Technical Journal

Kelly, Jr., J . R. (1956) . A new interpretation of information rate. 35,
917- 926.
Colloquia Mathematica Societatis Janos Bolyai

Thorp, E. O. and R. Whitley (1972). Concave utilities are distinguished
by their optimal strategies. 813- 830.
Econometrica
Bernoulli , D. (1954). Exposition of a new theory on the measurement of
risk (translated by Louise Sommer). 22 , 23- 36.
Hakansson, N. H. (1970). Optimal investment and consumption strategies
under risk for a class of utility functions. 38, 587- 607.
Els evier/ North Holland

Hakansson, N. H. and W . T . Ziemba (1995) . Capital growth theory. In
R. A. Jarrow , V. Maksimovic, and W. T. Ziemba (Eds.) , Finance, Hand-
books in OR & MS, Vol. 9, 65- 86.
Thorp, E. O. (2006). The Kelly criterion in blackjack sports betting and
the stock market. In S. A. Zenios and W. T. Ziemba (Eds.), Handbook
of Asset and Liability Management , Vol. 1, 387- 428.
xxii Acknowledgements
R eview of the Int ernational Statistical Institute

Thorp, E. O. (1969). Optimal gambling systems for favorable games. 37(3),
273- 293.
Springer
Lv, Y. and B. K. Meister (2009). Application of the Kelly criterion
to Ornstein-Uhlenbeck processes. Lecture Notes of the Institute for
Computer Sciences, 4, 1051- 1062.
The Journal of Finance

Markowitz, H. M. (1976). Investment for the long run: New evidence for
an old rule. 31(5), 1273- 1286.
Roll, R. (1973). Evidence on the "growth-optimum" model. 28(3) ,55 1- 566.
Wiley
Thorp, E. O. (2008) . Understanding the Kelly criterion. Wilmott, May
and September.
Ziemba, R. E. S. and W. T. Ziemba (2007). Postscript: The Renaissance
Medallion Fund. In Scenarios for Risk Management and Global Invest-
ment Strategies, 295-298.
World Scientific
Ziemba, W. T. and D. B. Hausch (2008). The Dr. Z betting system in
England. In D. B. Hausch, V. Lo, and W. T. Ziemba (Eds.) , Efficiency
of Racetrack Betting Markets , 567- 574.
We thank the following authors for permission to publish their new papers:
M. Bilgili J. M. Mulvey
I. V. Evstigneev E. Platen
M. H. A. Davis K. R. Schenk-Hoppe
M. A. H. Dempster M. Stutzer
T. Hens E. O. Thorp
S. Lleo T. M. Vural
L. C. Maclean W. T. Ziemba
Acknowledgements XXIII
IEEE Transactions of Info rmation Theory

Barron, A. R. and T. M. Cover (1988). A bound on the financial value of
information. 34(5), 1097-1100.
Journal of Banking and Finance

Samuelson, P. A. (1979). Why we should not make mean log of wealt h big
though years to act are long. 3, 305- 307.
Journal of Business
Grauer, R. R. and N. H. Hakansson (1986). A half century of returns
on levered and unlevered portfolios of stocks, bonds and bills, with and
without small stocks. 592, 287- 318.
Hakansson, N. H. (1971). On optimal myopic portfolio policies, with and
without serial correlation of yields. 44, 324- 334.
Journal of Econometrics
Stutzer, M. (2003). Portfolio choice with endogenous utility: A large devi-
ations approach. 116, 365- 386 .
Journal of Economic Dynamics and Control

Luenberger, D. G. (1993). A preference foundation for log mean-variance
criteria in portfolio choice problems. 17, 887- 906 .
MacLean, L. C. , R. Sanegre, Y. Zhao , and W. T. Ziemba (2004). Capital
growth with security. 28(4) , 937- 954.
Rudolf, M. and W. T. Ziemba (2004). Intertemporal surplus management.
28, 975- 990.
Journal of Political Economy

Latane , H. A. (1959). Criteria for choice among risky ventures. 67,
144- 155.
Journal of Portfolio Management

Chopra, V. K. and W. T . Ziemba (1993). The effect of errors in means ,
variances and co-variances on optimal portfolio choice. 19, 6- 11.
Ziemba, W. T . (2005). The symmetric downside-risk Sharpe ratio and the
evaluation of great investors and speculators. 32(1), 108- 122.
Mathematical Finance
Cover , T. M. (1991). Universal portfolios. 1(1), 1- 29.
XXIV Acknowledgements
Mathematics of Operations Research

Bell, R. M. and T. M. Cover (1980). Competitive optimality of logarithmic
investment . 5(2), 161- 166.
Browne, S. (1997). Survival and growth with a liability: Optimal portfolio
strategies in continuous time. 22(2),468- 493.
Ordentlich, E. and T. M. Cover (1998). The cost of achieving the best
portfolio in hindsight. 23(4), 960- 982.
Management Science
Browne, S. (2000). Risk-constrained dynamic active portfolio management.
46(9), 1188- 1199.

Hausch , D. B., W. T. Ziemba, and M. E. Rubinstein (1981). Efficiency of
the market for racetrack betting. 27, 1435- 1452 .
Hausch , D. B. and W. T. Ziemba (1985). Transactions costs, extent of
inefficiencies, entries and multiple wagers in a racetrack betting model.
31, 381- 394.
MacLean, L., W. T. Ziemba, and G. Blazenko (1992). Growth versus secu-
rity in dynamic investment analysis. 38(11), 1562- 1585.
Proceedings of the 4th Berkeley Symposium on Mathematical Statistics

and Probability
Breiman, L. (1961). Optimal gambling systems for favorable games. 1,
63-68.
Proceedings of the Business and Economics Section of the American

Statistical Association
Thorp, E. O. (1971). Portfolio choice and the Kelly criterion. 215- 224.
Proceedings National Academy of Science

Samuelson, P. A. (1971). The "fallacy" of maximizing the geometric mean
in long sequences of investing or gambling. 68, 2493-2496.
Quantitative Finance
MacLean, L. C., W. T. Ziemba, and Y. Li (2005). Time to wealth goals in
capital accumulation. 5(4) , 343-355.
Review of Economics and Statistics

Samuelson, P. A. (1969). Lifetime portfolio selection by dynamic stochastic
programming. 51, 239- 246.
Dalhousie University, Halifax, Canada, August 19, 2010.
Vivian and Edward Thorp, Newport Beach, California, 2004.

Leonard MacLean at the 12th International Conference on Stochastic Programming,
xxv
XXVI
Professor William T. Ziemba while visiting as a Christianson Fellow at St. Catherines

College, Oxford University in 2003. Beginning in 2003 and yearly thereafter he has given
a half-day lecture on the Kelly criterion theory and practice to the Masters students in the
Mathematical Finance program at the Mathematical Institute of Oxford University.

Kelly Capital PDF

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The Kelly Capital Growth Investment Criterion Downloaded from www.worldscientific.

KELLY CAPITAL GROWTH

Series Editor: William T. Ziemba

Advisory Editors: Robert C. Merton

Stanford University, USA

Espen Eckbo Paul A. Samuelson

Vol. 2 Efficiency of Racetrack Betting Markets (2008 Edition)

THEORY and PRACTICE

KELLY CAPITAL GROWTH

Library of Congress Cataloging-in-Publication Data

p. em. -- (World Scientific handboo k in financial economic series, 2010- 1732 ; 3)

British Library Cataloguing-in-Publication Data

Copyrig ht © 20 11 by Wo rld Scientific PublisWng Co. Pte. Ltd.

To my wife Gwenolyn, for her patience and encouragement, and Dalhousie

To Vivian, with whom I've shared "the long run"

This page is intentionally left blank

List of Contributors XVll

Acknow ledgments XXI

Part I: The Early Ideas and Contributions

1. Introduction to the Early Ideas and Contributions 3

2. Exposition of a New Theory on the Measurement of Risk 11

3. A New Interpretation of Information Rate 25

4. Criteria for Choice among Risky Ventures 35

5. Optimal Gambling Systems for Favorable Games 47

6. Optimal Gambling Systems for Favorable Games 61

7. Portfolio Choice and the Kelly Criterion 81

the American Statistical Association, 215- 224 (1971)

8. Optimal Investment and Consumption Strategies under Risk 91

9. On Optimal Myopic Portfolio Policies, with and without 113

10. Evidence on the "Growth-Optimum-Model" 125

Part II: Classic Papers and Theories

11. Introduction to the Classic Papers and Theories 143

12. Competitive Optimality of Logarithmic Investment 147

13. A Bound on the Financial Value of Information 153

14. Asymptotic Optimality and Asymptotic Equipartition 157

P. H. Algoet and T. M. Cover

15. Universal Portfolios 181

Mathematical Finance, 1(1), 1- 29 (1991)

16. T he Cost of Achieving the Best Portfolio in Hindsight 211

E. Ordentlich and T. M. Cover

17. Optimal Strategies for Repeated Games 235

M. Finkelstein and R. Whit ley

18. The Effect of Errors in Means, Variances and Co-Variances 249

V. K. Chopra and W. T. Ziemba

19. Time to Wealth Goals in Capital Accumulation 259

L. C. MacLean, W . T . Ziemba, and Y. Li

20 . Survival and evolutionary Stability of Rule the Kelly 273

1. V. Evstigneev, T. Hens, and K. R. Schenk-Hoppe

21. Application of the Kelly Criterion to Ornstein-Uhlenbeck 285

P art III: The R elationship of Kelly Optimization to

22. Introduction to the Relationship of Kelly Optimization to 301

23. Survival and Growth with a Liability: Optimal Portfolio 307

24 . Growth versus Security in Dynamic Investment Analysis 331

25 . Capital Growth with Security 355

26. Risk-Constrained Dynamic Active Portfolio Management 373

27. Fractional Kelly Strategies for Benchmark Asset Management 385

28 . A Benchmark Approach to Investing and Pricing 409

29. Growing Wealth with Fixed-Mix Strategies 427

M. A. H. Dempster, 1. V. Evstigneev, and

P art I V : Critics and A ssessing the G ood and Bad

30. Introduction to the Good and Bad Properties of Kelly 459

31. Lifetime Portfolio Selection by Dynamic Stochastic 465

32. Models of Optimal Capital Accumulation and Portfolio 473