Risk & Expected Value

[K-Pia]

What if Expected Value in percentage is less than the %risk ?
Is it rational to risk x% and expect to make less or equal than x% ?

Exemple :
Risk = 5% & Reward = 10%
Expected Value for P(G) = 1/2 :
10%*1/2 - 5%*1/2 = 5/2% = 2.50%
These are good returns*. But xRisk > E(x).

Would you allocate some of your capital ?
If I get Kelly right. He wouldn't allocate a penny.

* Here is a Simulation
Such as P(G) 1:2 & Odds 1:1

 

[K-Pia]

Well ...
It may not be rational if it's a one shot game.
But if we can replicate the bet, ad infinitum, then it is.
However I don't understand why Kelly wouldn't allocate.
Am I mistakenly thinking that he wouldn't ?

 

[Amalgam]

Isn't that just saying your Sharpe < 1? SPX has a Sharpe < 1. Would you buy and hold SPX?

 

[K-Pia]

Isn't that just saying your Sharpe < 1? SPX has a Sharpe < 1. Would you buy and hold SPX?

Yes, it could be the same kind of statement.
But no I wouldn't buy and hold SPX.
Especially at that price.

What's your point ?
That doesn't matter ?
It's a weak weakness ?

 

[Maverick74]

Expected value and risk are not an equality. Your equation makes no sense.

 

[K-Pia]

Expected value and risk are not an equality. Your equation makes no sense.

I know E(X) is different than risk.
So it's like comparing apples & oranges ?
Or rather apples and apple juice... ?

So no one cares that E(X) < Risk ?

So the real question is more :
How much are you willing to risk knowing E(X)

 

[Maverick74]

No. Your risk is determined by your expected utility. There are decades of research on this in economics. Google expected utility and risk tolerance. Your model is completely wrong. And you are going about this completely the wrong way.

 

[K-Pia]

No. Your risk is determined by your expected utility. There are decades of research on this in economics. Google expected utility and risk tolerance. Your model is completely wrong. And you are going about this completely the wrong way.

Expected utility ain't required.

 

[K-Pia]

http://arxiv.org/pdf/1405.0585v2.pdf

 

[Maverick74]

http://arxiv.org/pdf/1405.0585v2.pdf

LOL. You need to read your own articles. That article is all about expected utility. This place is really entertaining sometimes.