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Kelly criterion is just the square of Sharpe ratio. Sharpe is used pretty extensively from a strategy selection and risk management perspective.
by dcolkitt 5y ago
Kelly criterion is just the square of Sharpe ratio. Sharpe is used pretty extensively from a strategy selection and risk management perspective.
- SpicyP 5y agoThis is not correct. Kelly criterion is not the square of the sharpe ratio
- afryer 5y agohttps://ifta.org/public/files/journal/d_ifta_journal_11.pdf https://ifta.org/public/files/journal/d_ifta_journal_11.pdf Page 27: Vince(vi) and independently Thorpv(ii) provide a solution that satisfies the Kelly Criterion for the continuous finance case, often quoted in the financial community to the effect that “f should equal the expected excess return of the strategy divided by the expected variance of the excess return:” f = (m-r) / s^2 so it's Sharpe with variance instead of standard deviation in the denominator, correct?
- dcolkitt 5y agoYes, that's correct. An intuitive way to think about this is that Sharpe depends on the specific horizon you're using. E.g. annualized Sharpe will be sqrt(252) larger than daily Sharpe. It would not make sense to change the Kelly criterion based on a substitution of variables. In contrast variance, like returns, scales linearly with time horizon. Therefore the variance ratio is invariant to the time horizon.
- arthurcolle 5y agoPlease share this calculation, dying to know what kind of inter-universal Teichmüller space theoretic math you're using to come up with this.
- afryer 5y agohttps://news.ycombinator.com/item?id=27453365 https://news.ycombinator.com/item?id=27453365 Edward Thorpe and Ralph Vince both conclude that the Kelly Criterion in the continuous case is excess returns divided by variance, which is pretty close to the Sharpe Ratio, correct? Asking to understand better, not to be combative. Your comment made it seem like that formula is way off.