Closed on 05/11/07. See final comments below.
The Kelly Criterion is the most important money management technique, but cannot be implemented in sims, and requires manual intervention in ports. P123 lets you specify an Ideal Weight for new positions, on the assumption that your goal is to stay 100% invested. However, Kelly-optimal portfolios and their variants always keep some cash in reserve. I'm asking for one other parameter to specify the % Invested. (Default=100%)

In the simplest case of a 1-stock sim, K = W - (1-W)*L, where
K = Kelly investment fraction (= 1 - Reserve)
W = Winning percentage
L = Abs(AvgLoss) / AvgGain

Example: W=60% , L = 0.25, indicating darned good performance. Surprisingly, K=50%, i.e. only half of the assets should be invested, with the rest kept in reserve. [Alternative: invested in another security that has the same W & L, BUT whose outcomes are statistically independent. If the two securities are correlated, then a non-zero reserve (or greater diversification) is optimal.]
Results: Total score: 13 , # of Votes: 4 , Average: 3.2
a
 
8 (2)
b
 
3 (1)
c
 
2 (1)
d
Scores are calculated as (importance) × (# of votes), where importance ranges from 1 to 4.
Final Comments
Vlad writes: "There is so much in the request queue in terms of improving the quality of picks. Of course it is alwasy nice to see nice fresh ideas - if people like them they will be voted up."

I have to agree, and so am withdrawing the request in the hope that some other higher priority items will at last receive attention.
Requested by: jerrodmason
On date: 05/08/07
Category: Simulation

5 comments