Portfolio Kelly: Correlation-Aware Position Sizing

The Kelly Criterion

The Kelly Criterion tells you the optimal fraction of your bankroll to bet on a given opportunity. It maximizes the expected geometric growth rate of your portfolio. But standard Kelly assumes independent bets — which is rarely true in prediction markets.

Correlation matters

Political markets are correlated. If you bet on "Republican wins 2024" and "Trump wins 2024", you are not making two independent bets. Standard Kelly would over-allocate. Our Portfolio Kelly optimizer builds a correlation matrix and sizes positions accordingly.

How it works

1. Input your bankroll and risk tolerance (fractional Kelly) 2. Select markets you want to trade 3. The optimizer builds a correlation matrix from historical data 4. It outputs optimal position sizes for each market 5. Monte Carlo simulation estimates drawdown probability

Risk controls

• Full Kelly, Half Kelly, Quarter Kelly modes
• Maximum position size caps
• Sector concentration limits
• Daily loss limits

Results

In backtesting, Portfolio Kelly produced a 1.8 Sharpe ratio vs. 1.2 for equal-weight sizing on the same strategy.