I’m sure some people know about Efficient Frontier, but I’m guessing that there are less investors that know about Kelly Criterion. So what is Kelly Criterion and who is Kelly? Kelly worked at AT&T, and published his original paper back in 1956. Its math is quite involved with communication and information theory, mostly dealing with probabilities.

However, behind all the maths, there lies an astonishing result: by placing bet amounts according to Kelly Criterion (originally applied to horse-race gambling), one can maximize the returns in the long term. Here is the betting formula which has been tailored to stock trading: Continue Reading »