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Glen,
For the theory advanced so far, I suspected the diversification issue should be
tackled anyway, but couldn't find a relevant reference. Could you, please, guide me?
Thanks for the response.
Cheers, Vitaly
Glen Wallace wrote:
> Vitaly:
>
> First, trading at one-half optimal f produces much less than one-half the
> maximum profit, so it is not an easy comparison.
>
> Diversification works, but not to the point of doubling profit. The
> improved returns (or should I say reduced risks) diminish as you add more
> stocks. The math is too complex for *me* to explain, but an optimal fixed
> fraction "wager" with diversification of trading systems as well as stocks
> is the way to go.
>
> Regards.
>
> ----- Original Message -----
> From: Vitaly Larichev <vitaly@xxxxxxxxxxxxx>
> To: <metastock@xxxxxxxxxxxxx>
> Sent: July 11, 1999 09:22
> Subject: Optimal f and diversification
>
> > Hi everybody,
> >
> > I've been following the optimal f discussion with a great interest. Thanks
> a lot to those ready to
> > share the knowledge.
> >
> > Still, there is a thing I stumble over and over again regarding the
> optimal f. I have few books on
> > money/management, and those I could look through at a book store didn't
> help either (though I might
> > miss the answer).
> >
> > Let's take again the classical example of coin tossing. If the game has a
> positive expectation,
> > you'll profit, but the amount depends critically on the fraction of the
> capital you are willing to
> > risk on each trade. OK, fair enough. To be specific, let's assume my
> system does, say, 30 trades a
> > year, and with optimal f the profit is highest. If f is less than optimal,
> assume it's two times
> > less, then it would take, roughly speaking (I understand, there is not a
> direct proportionality
> > here), 60 trades or 2 years to achieve the same gain. Now, being a wise
> guy <g>, I know a thing
> > about diversification. So, I figure, instead of buying each time the same
> stock (market), why not to
> > buy two stocks with half money I would allocate otherwise. It would make f
> two times less optimal
> > for each stock, but if they are "uncorrelated" and, one more assumption to
> make my case, have the
> > same statistics with the respect to my trading system, it will look like
> trading the same stock 60
> > times a year with half f optimal that would deliver the same annual profit
> as a single stock with 30
> > trades and f optimal. But the risk of loosing money including drawdowns
> size is much less here. Then
> > one would be encouraged to go further and diversify even more where
> payments per trade (commissions,
> > slippage) may become a critical factor. So Kelly formula for finding f
> optimal which applies to a
> > single stock case, seems a bit too irrelevant to any practical
> implications?
> >
> > Do I miss something here?
> >
> > Thanks.
> >
> > Cheers, Vitaly
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