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Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A)
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Author: rrr12345 ✧  😊 😞
Number: of 15065 
Subject: Re: 90/10 or 10/90?
Date: 04/16/2023 3:26 PM
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Here's the paper on the Kelly criterion.

https://sites.math.washington.edu/~morrow/336_18/2...

After several pages of math a simple result is found at the bottom of page 8. According to this analysis, for a portfolio of stocks and T-Bills the optimal fraction of stocks is

f = (expected return of the stock market - expected return of T-Bills)/(standard deviation of stock market)^2

The year-to-year standard deviation of the return of stocks is about 0.2, so the result is

(expected return of stocks - expected return of T-Bills) ---> optimal fraction of stocks in the portfolio
4 ---> 100%
3 ---> 75%
2 ---> 50%
1 ---> 25%
0 ---> 0%
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