Introduction
The Kelley Criterion is a formula used in risk management and investment strategy to determine the optimal size of a series of bets or investments. In the context of stock investing, it helps determine what percentage of your capital you should allocate to a particular investment opportunity.
Modified Equation
The modified Kelley Criterion formula used in this calculator is:
f = (bp – q) / b
Where:
- f is the fraction of the current bankroll to invest
- b is the net odds received on a winning bet (expected return as a decimal)
- p is the probability of winning (as a decimal)
- q is the probability of losing (1 – p)
Note: This formula takes into account the expected loss percentage, allowing for more realistic scenarios where you don’t lose 100% of your investment on a losing trade.
Additional Information
- This is a theoretical optimal value and may be too aggressive for many investors.
- Many professional investors use a fraction (e.g., half) of the Kelly percentage to be more conservative.
- The accuracy of the calculation depends heavily on the accuracy of your probability, expected return, and expected loss estimates.
- Past performance doesn’t guarantee future results. Always consider your risk tolerance and diversification strategy.