A novel derivation and interpretation of the Kelly criterion

Andreas Kull

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The paper discusses multi-period investment processes under parameter uncertainty and criteria to maximize exponential growth.
Applying an information-theoretical argument, we determine for a Bernoulli process the investment strategy consistent with an expected exponential growth rate.
The strategy turns out to be directly linked to the Kelly strategy, thus lending a novel derivation and interpretation of the Kelly criterion.

Abstract

This paper discusses multiperiod investment processes under parameter uncertainty and the criterions with which to maximize exponential growth. By applying an information-theoretical argument to a Bernoulli process, we find the least biased investment strategy that is consistent with an expected exponential growth rate. This strategy is found to be directly linked to the Kelly strategy, thus giving a novel derivation and interpretation of the Kelly criterion.

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