Journal of Investment Strategies

Risk.net

Fractional Kelly strategies with low-risk stocks

Wai Mun Fong

  • The beta anomaly implies that investing in low-risk stocks is a compelling strategy for risk-averse long-term investors.
  • We provide an analytical framework for investors to easily quantify the long-term benefits of low-beta investing relative to those of other investment strategies.
  • Our framework is cast in continuous time and builds upon disparate theoretical work on the fractional Kelly criterion aimed at maximizing long-term median wealth. 

ABSTRACT

Stocks with high Sharpe ratios and low volatility are powerful drivers of long-term wealth. Low-beta stocks have precisely this feature. Using the framework of fractional Kelly strategies, we show that optimal portfolios with low-beta stocks generate higher median wealth and lower intra-horizon shortfall risk compared with traditional asset allocations using cap-weighted stock market indexes. Cap-weighted market portfolios resemble low-return, high-beta stocks and inherit their inefficiencies as wealth drivers.

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