The fascinating thing about volatility pumping (or optimal growth portfolio, see e.g. here) is that here volatility is not the same as risk, rather it represents opportunity. Additionally it is a generic mechanical strategy that is independent of asset classes.
My question:
Do you know examples where volatility pumping is actually implemented? What are the results? What are the pitfalls?
Answer
The optimal growth portfolio is obtained by applying the Kelly criterion which is one of the pillars of the sound risk management.
Ed Thorp's weekend forays to Las Vegas to play blackjack were one of the first historically documented cases of successful practical implementation of the Kelly strategy. Since then this method and its modifications have been systematically used by Thorp himself and other hedge fund managers as an important risk control tool.
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