Professional Documents
Culture Documents
Derivation of The MARS Equation
Derivation of The MARS Equation
Most gamblers and investors use their intuition to solve the tricky problem of
money managment:
What portion of your bankroll (assets) should be risked on any one bet
(investment)?
The purpose of this paper is to describe the mathematical equation that can be
used to optimize you money management. The examples will show some
practical uses of the equation, and will give you a chance to test your intuition
against the equation.
Suppose you know of a bet (investment) that guarantees you a 20% profit every
time you play. Let us define a number R as your return rate = 1.2 in this case.
This means that your bet is multiplied by 1.2 every time you play. If you start with
$100 and bet your entire bankroll on every play, after three plays you will have:
Likewise, if you knew of a game that guaranteed a 20% loss every time you
played, then R=0.8.
After three plays you will have:
The following table clearly demonstrates the difference between these two
games:
R=1.20 R=0.80
The MARS equation is so very useful at the racetrack, we will restate the
equation in a special handicapper's form:
Now suppose the bank raises its interest rates to 15%. How should you react?
Bibliography
Henry A. Latane. "Investment Criteria - A Three Asset Portfolio Balance
Model." The Review of Economics and Statistics, Vol. XLV, No. 4
(November, 1963), pp. 427-430.
J. L. Kelly, Jr.. "A New Interpretation Of The Information Rate." The Bell
System Technical Journal, July 1956, pp. 917-925.
Harry M. Markowitz. "Portfolio Selection - Efficient Diversification Of
Investments." Cowles Foundation, Yale University, 1959 / 1970.
Acknowledgement
The author wishes to acknowledge the assistance of Mr. Rodger Hui in
performing the necessary calculus to get from equation #1 to equation #2.
Copyright Notice
This paper is copyright © 1986 by Douglas McCormack
(douglas@cormactech.com). This paper may be freely copied and distributed in
unaltered form, provided the authors name and copyright remain attached.