Optimal Risk Budgeting under a Finite Investment Horizon

17 Pages Posted: 7 Dec 2013 Last revised: 3 Sep 2019

See all articles by Marcos Lopez de Prado

Marcos Lopez de Prado

Cornell University - Operations Research & Industrial Engineering; Abu Dhabi Investment Authority; True Positive Technologies

Ralph Vince


Qiji Jim Zhu

Western Michigan University

Date Written: December 24, 2013


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.

Keywords: Growth-optimal portfolio, risk management, Kelly Criterion, finite investment horizon, drawdown

JEL Classification: G10, G60, G70, C62, E60

Suggested Citation

López de Prado, Marcos and López de Prado, Marcos and Vince, Ralph and Zhu, Qiji Jim, Optimal Risk Budgeting under a Finite Investment Horizon (December 24, 2013). Available at SSRN: https://ssrn.com/abstract=2364092 or http://dx.doi.org/10.2139/ssrn.2364092

Marcos López de Prado

Cornell University - Operations Research & Industrial Engineering ( email )

237 Rhodes Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.orie.cornell.edu

Abu Dhabi Investment Authority ( email )

211 Corniche Road
Abu Dhabi, Abu Dhabi PO Box3600
United Arab Emirates

HOME PAGE: http://www.adia.ae

True Positive Technologies ( email )

United States

HOME PAGE: http://www.truepositive.com

Ralph Vince

None ( email )

Qiji Jim Zhu (Contact Author)

Western Michigan University ( email )

Kalamazoo, MI 49008
United States

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