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Tal Fishman
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Optimal Capital Allocation How to optimally allocate capital among trading strategies?

I'm trying to find an optimal way to allocate capital among trading strategies.

A book called "Quantitative Trading""Quantitative Trading" by Ernie Chan claims on page 97 that the optimal fraction of capital to allocate to a given trading strategy can be calculated by the following formula.

f = μ/σ2, where μ is the mean and σ2 is the variance of the return of the trading strategy.

, assuming This assumes that the trading strategies are statistically indepedentindependent and their returns have a normal distribution.

  • The formula looks deceptively simple. Does it actually work?
  • Do professionals use it at all?
  • The author calls this the Kelly formula. Is this correct? I thought the Kelly formula was (p(b + 1) - 1)/b$\frac{p(b + 1) - 1}b$?

Optimal Capital Allocation

I'm trying to find an optimal way to allocate capital among trading strategies.

A book called "Quantitative Trading" by Ernie Chan claims on page 97 that the optimal fraction of capital to allocate to a given trading strategy can be calculated by the following formula.

f = μ/σ2, where μ is the mean and σ2 is the variance of the return of the trading strategy.

, assuming that the trading strategies are statistically indepedent and their returns have normal distribution.

  • The formula looks deceptively simple. Does it actually work?
  • Do professionals use it at all?
  • The author calls this the Kelly formula. Is this correct? I thought the Kelly formula was (p(b + 1) - 1)/b?

How to optimally allocate capital among trading strategies?

I'm trying to find an optimal way to allocate capital among trading strategies.

"Quantitative Trading" by Ernie Chan claims on page 97 that the optimal fraction of capital to allocate to a given trading strategy can be calculated by the following formula.

f = μ/σ2, where μ is the mean and σ2 is the variance of the return of the trading strategy.

This assumes that the trading strategies are statistically independent and their returns have a normal distribution.

  • The formula looks deceptively simple. Does it actually work?
  • Do professionals use it at all?
  • The author calls this the Kelly formula. Is this correct? I thought the Kelly formula was $\frac{p(b + 1) - 1}b$?
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Tom Tucker
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I'm trying to find an optimal way to allocate capital among trading strategies.

A book called "Quantitative Trading" by Ernie Chan claims on page 97 that the optimal fraction of capital to allocate to a given trading strategy can be calculated by the following formula.

f = μ/σ2, where μ is the mean and σ2 is the variance of the return of the trading strategy.

, assuming that the trading strategies are statistically indepedentlyindepedent and their returns have normal distribution.

  • The formula looks deceptively simple. Does it actually work?
  • Do professionals use it at all?
  • The author calls this the Kelly formula. Is this correct? I thought the Kelly formula was (p(b + 1) - 1)/b?

I'm trying to find an optimal way to allocate capital among trading strategies.

A book called "Quantitative Trading" by Ernie Chan claims on page 97 that the optimal fraction of capital to allocate to a given trading strategy can be calculated by the following formula.

f = μ/σ2, where μ is the mean and σ2 is the variance of the return of the trading strategy.

, assuming that the trading strategies are statistically indepedently and their returns have normal distribution.

  • The formula looks deceptively simple. Does it actually work?
  • Do professionals use it at all?
  • The author calls this the Kelly formula. Is this correct? I thought the Kelly formula was (p(b + 1) - 1)/b?

I'm trying to find an optimal way to allocate capital among trading strategies.

A book called "Quantitative Trading" by Ernie Chan claims on page 97 that the optimal fraction of capital to allocate to a given trading strategy can be calculated by the following formula.

f = μ/σ2, where μ is the mean and σ2 is the variance of the return of the trading strategy.

, assuming that the trading strategies are statistically indepedent and their returns have normal distribution.

  • The formula looks deceptively simple. Does it actually work?
  • Do professionals use it at all?
  • The author calls this the Kelly formula. Is this correct? I thought the Kelly formula was (p(b + 1) - 1)/b?
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Tom Tucker
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I'm trying to find an optimal way to allocate capital among trading strategies.

A book called "Quantitative Trading" by Ernie Chan claims on page 97 that the optimal fraction of capital to allocate to a given trading strategy can be calculated by the following formula.

f = μ/σ2, where μ is the mean and σ2 is the variance of the return of the trading strategy.

, assuming that the trading strategies are statistically indepedently and their returns have normal distribution.

  • You just allocate f * capital to the trading strategy, correct?
  • The formula looks deceptively simple. Does it actually work?
  • Do professionals use it at all?
  • The author calls this the Kelly formula. Is this correct? I thought the Kelly formula was (p(b + 1) - 1)/b?

I'm trying to find an optimal way to allocate capital among trading strategies.

A book called "Quantitative Trading" by Ernie Chan claims on page 97 that the optimal fraction of capital to allocate to a given trading strategy can be calculated by the following formula.

f = μ/σ2, where μ is the mean and σ2 is the variance of the return of the trading strategy.

, assuming that the trading strategies are statistically indepedently and their returns have normal distribution.

  • You just allocate f * capital to the trading strategy, correct?
  • The formula looks deceptively simple. Does it actually work?
  • Do professionals use it at all?
  • The author calls this the Kelly formula. Is this correct? I thought the Kelly formula was (p(b + 1) - 1)/b?

I'm trying to find an optimal way to allocate capital among trading strategies.

A book called "Quantitative Trading" by Ernie Chan claims on page 97 that the optimal fraction of capital to allocate to a given trading strategy can be calculated by the following formula.

f = μ/σ2, where μ is the mean and σ2 is the variance of the return of the trading strategy.

, assuming that the trading strategies are statistically indepedently and their returns have normal distribution.

  • The formula looks deceptively simple. Does it actually work?
  • Do professionals use it at all?
  • The author calls this the Kelly formula. Is this correct? I thought the Kelly formula was (p(b + 1) - 1)/b?
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Tom Tucker
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