This week has been really rough for tech manufacturing and income stocks. But what really saved my portfolio was my margin account which held up while the rest of my portfolio got battered. I really look forward to creating another back-tested equity portfolio in time before my talk.
Anyway, one possible middle ground between the war-chest and the leveraged portfolio is the Kelly Criterion. If you have heard about the casino antics of Ed Thorpe, you will know that he was one of the first to come up with a practical approach towards making bets using the Kelly Formula.
You can find the derivation of the formula for the Kelly Criterion for stocks on this link.
For most of us, we just need to know that the proportion of our war-chest to devote to an investment is equal to ( stock return – risk free rate ) / ( standard …