TY - JOUR

T1 - Diversification and limited information in the Kelly game

AU - Medo, Matúš

AU - Pis'mak, Yury M.

AU - Zhang, Yi Cheng

PY - 2008/10/15

Y1 - 2008/10/15

N2 - 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 [J.L. Kelly, IEEE Transactions on Information Theory 2 (1956) 185-189] 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.

AB - 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 [J.L. Kelly, IEEE Transactions on Information Theory 2 (1956) 185-189] 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.

KW - Diversification

KW - Information

KW - Kelly game

KW - Portfolio optimization

UR - http://www.scopus.com/inward/record.url?scp=49649121187&partnerID=8YFLogxK

U2 - 10.1016/j.physa.2008.07.007

DO - 10.1016/j.physa.2008.07.007

M3 - Article

AN - SCOPUS:49649121187

VL - 387

SP - 6151

EP - 6158

JO - Physica A: Statistical Mechanics and its Applications

JF - Physica A: Statistical Mechanics and its Applications

SN - 0378-4371

IS - 24

ER -