KellyRatio: calculate Kelly criterion ratio (leverage or bet size) for a strategy
Description
Kelly criterion ratio (leverage or bet size) for a
strategy.
Usage
KellyRatio(R, Rf = 0, method = "half")
Arguments
R
a vector of returns to perform a mean over
Rf
risk free rate, in same period as your returns
method
method=half will use the half-Kelly, this
is the default
Details
The Kelly Criterion was identified by Bell Labs scientist
John Kelly, and applied to blackjack and stock strategy
sizing by Ed Thorpe.
The Kelly ratio can be simply stated as: bet size
is the ratio of edge over odds. Mathematically, you are
maximizing log-utility. As such, the Kelly criterion is
equal to the expected excess return of the strategy
divided by the expected variance of the excess return, or
As a performance metric, the Kelly Ratio is calculated
retrospectively on a particular investment as a measure
of the edge that investment has over the risk free rate.
It may be use as a stack ranking method to compare
investments in a manner similar to the various ratios
related to the Sharpe ratio.
References
Thorp, Edward O. (1997; revised 1998). The Kelly
Criterion in Blackjack, Sports Betting, and the Stock
Market.
http://www.bjmath.com/bjmath/thorp/paper.htmhttp://en.wikipedia.org/wiki/Kelly_criterion