The Kelly criterion and fixed fraction betting is briefly introduced and extended to left bounded profit/loss distributions (i.e. profit/loss distributions that are bounded from the left). Various inequalities are studied and analytical tools are offered. Click here for the full text.
Introduction
Let $X$ be a real random variable with support $[-1,\infty[$. Following Kelly [1] consider the reinvested growth of a fixed fraction investment in an instrument that has payoff $X$.
Wn=Wn−1(1+αXn),Xn∼X,α∈[0,1].
(If the support of $X$ is bounded the restriction on $\alpha$ can be relaxed.)
The long run growth rate is
Gα=limN→∞1NlogWNW0.
By the law of large numbers
Gα=Elog(1+αX)a.s..
For a given $X$ the function $G_\alpha$ is concave in $\alpha$, and, writing $G'(\alpha)=dG/d\alpha$ we have $G'(0)=E X$.
Define the maximal growth rate as
G[X]=maxαElog(1+αX).
$G[X]$ and $\mathsf{E} X$
Since the slope of $G_\alpha$ at $\alpha=0$, i.e. $G'(0)=\mathsf{E} X$, determines the location of the maximum we have, for $\alpha\in[0,1]$,
EX≤0⇔G[X]=0,αopt=0,
EX>0⇔G[X]>0,αopt>0
Upper bound for $G[X]$
Jensen’s inequality yields
$G_\alpha \leq \log(1+\alpha {{\mathsf{E}}}X)$ and because of $\alpha<1$
and $\log(1+x) \leq x$ it is
G[X]≤log(1+EX)≤EX.
Mixtures
Consider a mixture $p(X)=\int dY p(X|Y)p(Y)$. ...
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