Is At&T A Good Stock To Buy For Long Term Kelly Criterion for Stock Trading Size

You are searching about Is At&T A Good Stock To Buy For Long Term, today we will share with you article about Is At&T A Good Stock To Buy For Long Term was compiled and edited by our team from many sources on the internet. Hope this article on the topic Is At&T A Good Stock To Buy For Long Term is useful to you.

Kelly Criterion for Stock Trading Size

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:

K% = ( (b+1) * p – 1) / b = ( b*p – (1-p) ) / b

Win probability (p): The probability that any given trade you make will return a positive amount.

Win/loss ratio (b) or odds: The total positive trade amounts divided by the total negative trade amounts.

If you think of b as the odds of b-to-1, payout of b when betting 1 unit of money, the numerator is simply the mean value of expected payout, or the so-called “edge”. Therefore, K% can be expressed as edge/odd. For obvious reason, you don’t want to bet in any game where the expected payout is 0 or negative.

If Kelly Criterion is so great, why is that this is not heard or used very often in the investing world. There are a couple of reasons that prevent it to be used practically:

  1. The volatility of strictly using Kelly Criterion is quite big. Despite that in the long term, probabilistically speaking your portfolio will have the maximum return possible, the ups and downs are too big to be digested by most people. Therefore, people talk about using “half Kelly” or half of the bet amount calculated from Kelly Criterion in attempt to reduce the portfolio volatility.
  2. To use Kelly Criterion, it requires knowing how good you trade stocks (in terms of p & b). Obviously, if you don’t know exactly how much your “edge” is, the Kelly betting amount will probably be off from the correct amount. Estimating and knowing your edge will be a much harder task than calculating the Kelly betting amount.

Despite the mathematical correctness of Kelly Criterion, it is much harder to invest such in practice. Aren’t there anything that we can walk away from such a terrific investing formula? Indeed, there is. Here is what I personally learned after investing stocks for almost 10 years now. The riskier the stock/or entry point is, the less amount that you should put in; the safer the stock/or entry point is, the more amount that you should put in. This is exactly the spirit of Kelly Criterion that bet should be proportional to your edge or your supposed advantage. I have been burned by stupid bets so many times that I finally learned to carefully size each of my stock transaction. In fact, sizing of your transaction is equally important if not more than what stocks you pick. While most of the investment world talks about what to buy, much less attention is spent on how much one should buy. But for every transaction, it always consists of the following elements: what (stock) to buy/sell, when to buy/sell, and how much to buy/sell. For successful investing, all three elements must be carefully chosen. And Kelly Criterion helps you on deciding the last element: how much.

For more related articles, one can check out the article from investopedia. Tom Weideman also has an excellent article using simple calculus for deriving Kelly Criterion with less math from information theory. You can find the original Kelly’s paper here.

Video about Is At&T A Good Stock To Buy For Long Term

You can see more content about Is At&T A Good Stock To Buy For Long Term on our youtube channel: Click Here

Question about Is At&T A Good Stock To Buy For Long Term

If you have any questions about Is At&T A Good Stock To Buy For Long Term, please let us know, all your questions or suggestions will help us improve in the following articles!

The article Is At&T A Good Stock To Buy For Long Term was compiled by me and my team from many sources. If you find the article Is At&T A Good Stock To Buy For Long Term helpful to you, please support the team Like or Share!

Rate Articles Is At&T A Good Stock To Buy For Long Term

Rate: 4-5 stars
Ratings: 5689
Views: 51565802

Search keywords Is At&T A Good Stock To Buy For Long Term

Is At&T A Good Stock To Buy For Long Term
way Is At&T A Good Stock To Buy For Long Term
tutorial Is At&T A Good Stock To Buy For Long Term
Is At&T A Good Stock To Buy For Long Term free
#Kelly #Criterion #Stock #Trading #Size

Source: https://ezinearticles.com/?Kelly-Criterion-for-Stock-Trading-Size&id=190584

Related Posts

default-image-feature

Investors Coming Back To U.S Stocks This Month Are Going Why Investing in Real Estate Made Me a Millionaire and Investing in Stocks Didn’t

You are searching about Investors Coming Back To U.S Stocks This Month Are Going, today we will share with you article about Investors Coming Back To U.S…

default-image-feature

Invest In The Total Stock Market Or S&P Index Fund Advantages of Passively-Managed Index Funds Over Actively-Managed Mutual Funds

You are searching about Invest In The Total Stock Market Or S&P Index Fund, today we will share with you article about Invest In The Total Stock…

default-image-feature

In.Practice How Do.Employees Make Money Out Of Stock Options Ways To Make Domain Name Investing Pay Off

You are searching about In.Practice How Do.Employees Make Money Out Of Stock Options, today we will share with you article about In.Practice How Do.Employees Make Money Out…

default-image-feature

In What Market Do Most U.S. Stock Market Transactions Occur Forex Markets – Trading Internationally

You are searching about In What Market Do Most U.S. Stock Market Transactions Occur, today we will share with you article about In What Market Do Most…

default-image-feature

In The Mid To Late-1990S The Stock Market Was A National Debt History

You are searching about In The Mid To Late-1990S The Stock Market Was A, today we will share with you article about In The Mid To Late-1990S…

default-image-feature

Impact On Stock Price For Merging In An All-Stock Deal Ethics in Business

You are searching about Impact On Stock Price For Merging In An All-Stock Deal, today we will share with you article about Impact On Stock Price For…