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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$$\frac{p(b + 1) - 1}b$$?
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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?
deleted 69 characters in body
Tom Tucker
• 576
• 3
• 11

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?
Tom Tucker
• 576
• 3
• 11
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