Diversification and limited information in the Kelly game

Medo, Matúš; Pis’mak, Yury M.; Zhang, Yi-Cheng

doi:10.1016/j.physa.2008.07.007

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Journal article

Diversification and limited information in the Kelly game

Medo, Matúš Physics Department, University of Fribourg, Switzerland
Pis’mak, Yury M. Department of Theoretical Physics, State University of Saint-Petersburg, Russia
Zhang, Yi-Cheng Physics Department, University of Fribourg, Switzerland - Lab of Information Economy and Internet Research, University of Electronic Science and Technology, Chengdu, China

11.07.2008

Published in:

Physica A: Statistical Mechanics and its Applications. - 2008, vol. 387, no. 24, p. 6151-6158

English Financial markets, with their vast range of different investment opportunities, can be seen as a system of many different simultaneous games with diverse and often unknown levels of risk and reward. We introduce generalizations to the classic Kelly investment game [J.L. Kelly, IEEE Transactions on Information Theory 2 (1956) 185–189] that incorporates these features, and use them to investigate the influence of diversification and limited information on Kelly-optimal portfolios. In particular, we present approximate formulas for optimizing diversified portfolios and exact results for optimal investment in unknown games where the only available information is past outcomes.

Faculty

Faculté des sciences et de médecine

Department

Département de Physique

Language