Tuesday, June 8, 2010

Log-Optimal Portfolio

A while back, I wondered, I think in the comments which is probably why I cannot find it, whether there is some optimal investment strategy that somebody who is risk agnostic could pursue. Well, apparently there's this thing called Kelly criterion, which maximizes expected return for people with logarithmic utility functions. Ah, but why logarithmic utility, you ask? This led FLG to this paper that's very compellingly entitled "A Complete Explicit Solution to the Log-Optimal Portfolio Problem." The paper asserts the Weber-Fechner law as support for the assumption of logarithmic utility.

What does all this mean? FLG isn't sure, but he thinks that you're supposed to optimize your utility by maximizing the log of the inverse of the probability of the outcome.

What does that mean? FLG has no fucking clue.

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