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Kelly Criterion
Kelly Criterion
2 selected
Difficulty 5-6
2 unseen
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Intermediate
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2 intermediate
Adapts to your performance
Question 1 of 2
120s
intermediate (5/10)
conceptual
Practitioners often use "fractional Kelly"
f
=
α
f
∗
with
α
∈
(
0
,
1
)
rather than the full Kelly bet. What is the main reason?
Hide and think first
A.
Robustness to estimation error in
p
: full Kelly assumes the *true* edge; overestimated
p
leads to over-betting and lower growth
B.
Behavioral comfort: full Kelly produces drawdowns that human bettors find psychologically intolerable
C.
Liquidity constraints: full Kelly assumes infinite divisibility of the bankroll, which fails at integer-bet thresholds
D.
Tax considerations: full Kelly optimizes pre-tax wealth, while fractional Kelly optimizes post-tax growth at typical capital gains rates
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