Tactical Asset Allocation in Stock Indices: A Kelly Criterion–Based Approach

Abstract

The study shows how index funds and exchange-traded funds (ETFs) can be used for tactical asset allocation by using a modified Kelly criterion. Index funds and ETFs are good for strategic asset allocation, but there is little room for tactical asset allocation. This study nevertheless demonstrates how to use index funds and ETFs to do tactical asset allocation. People who invest in index funds or ETFs can get better risk-adjusted returns on their money no matter what kind of risk they are willing to take. The study uses the Kelly criterion in the Indian context to find portfolios that have better risk-adjusted returns.