arXiv Open Access 2025

Tackling estimation risk in Kelly investing using options

Fabrizio Lillo Piero Mazzarisi Ioanna-Yvonni Tsaknaki

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Abstrak

The Kelly criterion provides a general framework for optimizing the growth rate of an investment portfolio over time by maximizing the expected logarithmic utility of wealth. However, the optimality condition of the Kelly criterion is highly sensitive to accurate estimates of the probabilities and investment payoffs. Estimation risk can lead to greatly suboptimal portfolios. In a simple binomial model, we show that the introduction of a European option in the Kelly framework can be used to construct a class of growth optimal portfolios that are robust to estimation risk.

Topik & Kata Kunci

q-fin.MF

Penulis (3)

Fabrizio Lillo

Piero Mazzarisi

Ioanna-Yvonni Tsaknaki

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APA MLA BibTeX

Lillo, F., Mazzarisi, P., Tsaknaki, I. (2025). Tackling estimation risk in Kelly investing using options. https://arxiv.org/abs/2508.18868

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Informasi Jurnal

Tahun Terbit: 2025
Bahasa: en
Sumber Database: arXiv
Akses: Open Access ✓