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Hi Glen and Lionel
In "Portfolio Management Formulas" Vince provides the following "Kelly
formula" for determining Optimal f for a sequence of "bets".
f=((B+1)*P-1)/B
B = ratio fo amount won on winners to amount lost on losers
P = Probability of inning bet
F = optimal betting fraction
This probably works using stocks because you can buy odd lots, i.e., 863
shares. Not so easy in spreads or buying 8.6 contracts of corn.
Rick has a stock and gambling background maybe he can help explain how it
works in real life.
With contracts, where this breaks down is when the price gaps through your
stop and is off to the races. Sigma 3, 4 and 5 events are the real equity
killers.
Hence the use of non-Gaussian probability tools (e.g.,
fat-tail estimators, rare event analysis) to quantify their risks. ..."
Will dig out Mills' work on the GARCH (Generalized Autoregressive
Conditionally Heteroskedastic) models for stochastic processes to generate
fat-tail distributions and volatility clustering if you're interested Glen.
Best regards
Walter
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