What is the Kelly Criterion?

What is the Kelly Criterion?

Approach: Define the formula for optimal position sizing.

A formula used to determine the optimal size of a series of bets to maximize the logarithm of wealth. f* = (bp - q) / b, where f* is the fraction of the bankroll to wager, b is the odds, p is the probability of winning, and q is the probability of losing.

Follow-up: What is a 'fractional Kelly' strategy?

Key concepts: expected log wealth, bankroll management, edge.