Fat Tailed Kelly

Asset returns have fat tails. Traditional mean-variance analysis, however, assumes that asset returns are normally distributed, with thin tails. A natural extension of the normal distribution is the α-stable distribution, which has fat tails, skewness—and infinite variance, which makes traditional mean-variance optimization impossible. In this talk, I review the data, examine the investment implications, and discuss the math of fat tailed, α-stably distributed asset returns.

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