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Open AccessArticle

Optimal Risk Budgeting under a Finite Investment Horizon

1
Lawrence Berkeley National Laboratory, Berkeley, CA 94720, USA
2
Vince Strategies, LLC, The Chrysler Building, 405 Lexington Ave 26th fl., New York, NY 10174, USA
3
Department of Mathematics, Western Michigan University, 1903 West Michigan Avenue, Kalamazoo, MI 49008, USA
*
Author to whom correspondence should be addressed.
Risks 2019, 7(3), 86; https://doi.org/10.3390/risks7030086
Received: 16 February 2019 / Revised: 14 July 2019 / Accepted: 18 July 2019 / Published: 5 August 2019
The Growth-Optimal Portfolio (GOP) theory determines the path of bet sizes that maximize long-term wealth. This multi-horizon goal makes it more appealing among practitioners than myopic approaches, like Markowitz’s mean-variance or risk parity. The GOP literature typically considers risk-neutral investors with an infinite investment horizon. In this paper, we compute the optimal bet sizes in the more realistic setting of risk-averse investors with finite investment horizons. We find that, under this more realistic setting, the optimal bet sizes are considerably smaller than previously suggested by the GOP literature. We also develop quantitative methods for determining the risk-adjusted growth allocations (or risk budgeting) for a given finite investment horizon. View Full-Text
Keywords: Growth-optimal portfolio; risk management; Kelly criterion; finite investment horizon; drawdown Growth-optimal portfolio; risk management; Kelly criterion; finite investment horizon; drawdown
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López de Prado, M.; Vince, R.; Zhu, Q.J. Optimal Risk Budgeting under a Finite Investment Horizon. Risks 2019, 7, 86.

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