Abstract

https://ssrn.com/abstract=2364092
 


 



Optimal Risk Budgeting under a Finite Investment Horizon


Marcos Lopez de Prado


Guggenheim Partners, LLC; Lawrence Berkeley National Laboratory; Harvard University - RCC

Ralph Vince


LSP Partners, LLC

Qiji Jim Zhu


Western Michigan University

December 24, 2013


Abstract:     
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.

Number of Pages in PDF File: 25

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

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


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Date posted: December 7, 2013 ; Last revised: July 5, 2015

Suggested Citation

Lopez 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

Contact Information

Marcos Lopez de Prado
Guggenheim Partners, LLC ( email )
330 Madison Avenue
New York, NY 10017
United States
HOME PAGE: http://www.QuantResearch.org
Lawrence Berkeley National Laboratory ( email )
1 Cyclotron Road
Berkeley, CA 94720
United States
HOME PAGE: http://www.lbl.gov

Harvard University - RCC ( email )
26 Trowbridge Street
Cambridge, MA 02138
United States
HOME PAGE: http://www.rcc.harvard.edu
Ralph Vince
LSP Partners, LLC ( email )
35185 Holbrook Rd
Bentleyville, OH 44022
United States
Qiji Jim Zhu (Contact Author)
Western Michigan University ( email )
Kalamazoo, MI 49008
United States
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