Dynamic Mean-Variance Efficient Fractional Kelly Portfolios in a Stochastic Volatility Model
64 Pages Posted: 20 Aug 2020
Date Written: August 13, 2020
Fractional Kelly portfolios are popular investment strategies in the market. In this paper, we improve the mean-variance efficiency of a fractional Kelly portfolio by minimizing the variance of the return of a portfolio subject to the constraint that the expected return rate of the portfolio is as high as that of the fractional Kelly portfolio. We consider so-called equilibrium portfolio strategies due to time inconsistency caused by the mean-variance criterion. We drive an equilibrium strategy in closed form and show that it reduces the variance of portfolio return compared to the fractional Kelly portfolio, although the reduction is quantitatively small.
Keywords: fractional Kelly portfolios, dynamic mean-variance analysis, stochastic volatility, time inconsistency, equilibrium strategies
JEL Classification: G11, D81, C61
Suggested Citation: Suggested Citation