Kelly criterion formula: bet f* = (bp - q)/b
Kelly criterion
Kelly criterion formula: bet f* = (bp - q)/b
The Kelly criterion is a formula used for risk allocation in betting and investing. It aims to maximize the long-term expected value of the logarithm of wealth, which equates to maximizing the long-term expected geometric growth rate of wealth.
Example
If you bet $100 with odds of 2 (b=2) and the probability of winning (p) is 0.6, the Kelly bet size (f*) would be calculated as (2*0.6 - 0.4)/2 = 0.2. Thus, you would bet 20% of your bankroll.
Understanding the Kelly criterion helps investors and gamblers optimize their bets and investments for maximum long-term growth.
Related concepts
the Capital Asset Pricing Model (CAPM) says
CAPM formula: Expected return = Rf + β(Rm - Rf)
Quantity theory of money
MV = PY equation
Value at risk
Value at Risk (VaR) estimates potential loss under normal market conditions
Cyclically adjusted price-to-earnings ratio
Price-to-Earnings Ratio (P/E) measures market value relative to earnings
Greeks (finance)
Greeks measure sensitivity of option prices to underlying parameters
Glossary of contract bridge terms
Margin of safety principle: Buy below intrinsic value
Educational content, not financial advice.
One email a day: 5 concepts + the 5 stories that matter →
Swipe through 100 ML concepts daily
Open TickerNews