> A portfolio with low risks and high returns? [...] Of course, if you already know the exact weights
Or! In this case, it reduces to a one-dimensional optimisation thanks to the structure of the problem.
What we're optimising in portfolio selection is not the return of a single investment, but of a lifetime of investments. And thanks to compounding, that is a function of both risk and return. So we can find the optimal allocation without making any tradeoff: https://two-wrongs.com/the-misunderstood-kelly-criterion.htm...
Not quite, because one big input is the ratio of your investments to your annual savings. Large drawdowns are bad late in life, early in life they're not such a big deal. Kelly prohibits very profitable bets when they come with considerable risk of ruin (because you lose out on any future compounding when you zero out your wealth), but that is too conservative when you're young and your portfolio is small relative to your income.
The article even hints at this by observing that the discounted sum of future salaries are part of your current wealth. Which is exactly correct and also -- if you're young -- the most significant variable by several orders of magnitude. Curiously, the author understands this but doesn't care.
Or! In this case, it reduces to a one-dimensional optimisation thanks to the structure of the problem.
What we're optimising in portfolio selection is not the return of a single investment, but of a lifetime of investments. And thanks to compounding, that is a function of both risk and return. So we can find the optimal allocation without making any tradeoff: https://two-wrongs.com/the-misunderstood-kelly-criterion.htm...