No. of Recommendations: 7
Here's the paper on the Kelly criterion.
sites.math.washington.edu: PDF documentAfter several pages of math a simple result is found at the bottom of page 8. According to this analysis, for a portfolio of stocks and T-Bills the optimal fraction of stocks is
f = (expected return of the stock market - expected return of T-Bills)/(standard deviation of stock market)^2
The year-to-year standard deviation of the return of stocks is about 0.2, so the result is
(expected return of stocks - expected return of T-Bills) ---> optimal fraction of stocks in the portfolio
4 ---> 100%
3 ---> 75%
2 ---> 50%
1 ---> 25%
0 ---> 0%
