"ukraine at 25: evaluation of the past and plans for the future." by proskurin olexandr
TRANSCRIPT
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Ukrainian IT sector – one of those least sectors which maintained its growth in
2010-2014 period
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Investment activity overview
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The approach which uses industry information in order to gain future performance information
Market volume
Type of industry
Number of employees
Initial
investments
LocationNumber of competitors
Probability and return of :• Failure• Break even• Success
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Typical milestones of venture industry company
Prototype creation
Successful prototype testing
Successful sales and high market share
Start of sales IPO
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The main problem
‘’ How using the information about the probabilities of success/break even/failure and corresponding returns define the sum to invest on each milestone?’’
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Applications of Kelly criterion
Stock market Black jack Sports betting
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2 types of Kelly criterion
𝑓 =𝑝𝑏−𝑞𝑏
“Bookmaking” criterion
Classical criterion
p – probability of successq – probability of failureb – is the net odds received on the wager ("b to 1”)f – Kelly proportion of capital
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Example. Description1st project :
• with probability 40% won’t
bring anything
• with probability 35% will
bring x1.1 of costs invested
• with probability 25% will
bring x7 of costs invested
2nd project:
• with probability 30% won’t
bring anything
• with probability 40% will
bring 1.12 of costs invested
• with probability 30% will
bring x6 of costs invested
Capital : 40 000 000 $
Each project has 3 milestones:0 – the beginning1 – intermediate step2 – final step
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Markowitz approachUsing Marcowitz criterion with risk aversion coefficient which
equals 7 we have next results:
1st project : 1 502 700$ 2nd project : 2 057 000$
Rest of sum should be invested into cash(non-risk asset)
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Kelly approach. Step 1Using «bookmaking» Kelly criterion we need to find the proportions of a capital which should be invested into projects:
1st project : 5 000 000 $2nd project : 6 400 000 $
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Kelly approach. Additional information
Consider that we have received the next piece of information:
Now we need to use classical Kelly criterion in order to define the proportions of 5 000 000 and 6 400 000 which we need to invest on each of milestones.
Project 1 Project 2
From 0 to 1 80% 90%
From 1 to 2 53% 80%
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Kelly approach. Step 2
Project 1 Project2
From 0 to 1 1 400 000$ 4 257 000$
From 1 to 2 192 000$ 3 831 000$
Overall 1 592 000$ 8 088000$
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Results comparison
Marcowitz Kelly0.00
5000000.00
10000000.00
15000000.00
20000000.00
25000000.00
Standart deviation
Marcowitz Kelly0.00
2000000.00
4000000.00
6000000.00
8000000.00
10000000.00
12000000.00
14000000.00
Mean
Marcowitz Kelly0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Mean/standrart deviation ratio