J. Appl. Rob.

20,563-573 (1983)
Printed in Israel
@Applied h b a b i l i t y Trust 1983

THE PROPORTIONAL BETTOR'S RETURN ON INVESTMENT

S. N. ETHIER,. Michigan State University

S . TAVA&,** Colorado State University

AbstrPet
Suppose you repeatedly play a game of chance in which you have the
advantage. Your return on investment is your net gain divided by the total
amount that you have bet. It is shown that the ratio of your return on
investment under optimal proportional betting to your return on investment
under constant betting converges to an exponential distribution with mean 1 as
your advantage tends to 0. The case of non-optimal proportional betting is also
treated.
CONVERGENCE IN DISTRIBUTION; GAMMA DISTRIBUTION, BE'ITING SYSTEMS

1. Introduction
Consider a game of chance that is played repeatedly and in which at each trial
the bettor either wins or loses the amount of his bet. Suppose that the win
probability p satisfies f < p < 1, so that the game is advantageous. Given
f E (0,1], one possible strategy is for the bettor to wager a proportion f of his
--
current fortune at each trial. Letting X,, Xz,. be independent and identically
distributed (i.i.d.) with
1 with probability p
(1.1) xl={
-1 with probability 1- p,
the proportional bettor's fortune after n trials is

Received 30 September 1982.

* Postal address: Department of Statistics and Probability, Michigan State University, East
Lansing, MI 48824, U.S.A.
Supported in part by NSF Grant Ma-8102063.
** Postal address: Department of Statistics, Colorado State University, Fort Collins, CO 80523,
U.S.A.

563
564 S. N. ETHIER AND S. TAVARk

where Fo is his initial fortune (a positive constant). The exponential rate of

growth of his fortune is defined by
(1.3) Gp (f) = E log(1+ fxi),
since limn,,(l/n)log(Fn/Fo) = G p ( f )a.s. by the law of large numbers. In
particular, if f is such that Gpcf) > 0, then F, +t~ a s . The choice f * of f that
maximizes Gpcf) (namely, f * = 2p - 1) results in an optimal betting system
(Kelly (1956), Breiman (1961), Finkelstein and Whitley (1981)), which is often
referred to as the Kelly system.
Our interest centers on the proportional bettor’s return on investment (i.e.,
net gain divided by total amount bet), which after n trials is given by

(1.5)
and
R, -
Assume that f is such that Gpcf)> 0. In Section 2 we show that as n + t ~ ,
0
R

where denotes convergence in distribution and

1
(1.7) R=
f $ (Fo/Fk)
-1

The random variable R, which by (1.5) represents the proportional bettor’s

(asymptotic as n +t~) return on investment, can be shown to satisfy Cb< R < 1
almost surely and
(1.8) ER < EX1.
The latter result says that the expected return on investment under proportional
betting is less than it is under constant betting. For fixed p and f, it is difficult to
say by how much, but asymptotic results can be obtained by letting p +f + and
f+O+.
Fix (Y E (0,2). Then G ( l + r y z>( 0~ for
~ ) E positive and sufficiently small, and
-
for such E we let X1(c), X*(E), . be i.i.d. with XI(&)given by (1.1) with
p = (1 + ~ ) / 2and
, we define R - ( E )by (1.7) and (1.2) with Xi = Xi( E ) and f = ( Y E .
This corresponds to the case in which the betting proportion is o! times the
optimal betting proportion. In Section 3 we show that as E 4 0 + ,
The proportional bettor's return on investment 565

R"(E)/EX~(E) - 0
gamma (i- 1,;) ,

where gamma(8, A ) denotes the distribution on ( 0 , ~ )with density g(x) =

T(B)-'A 'x '-'e-"'. Moreover, we have uniform integrability, so

In the case of optimal proportional betting, a = 1 and (1.9) becomes

(1.11) R ' ( E )/Ex~(E)A exponential&),
where exponential(A) denotes the distribution on (0, w) with density g(x) =
Ae-"", while (1.10) reduces to
(1.12) = i.
lim ER'(E)/EX~(E)
c 4 +

In a recent paper, Wong (1981) argued that the optimal proportional bettor's
return on investment is only about one-half of that of the constant bettor, at least
when the actual number of wins is approximately the expected number. By (1.6),
the latter condition is unnecessary. Ignoring it and assuming that Wong meant
expected return on investment, we see that (1.12) can be viewed as a precise
formulation of Wong's assertion.
Observe that
(1.13) h ( a )E !$+P{R"(E)/EXI(E)> 1)
represents the (asymptotic as E +0 + ) probability that proportional betting
outperforms constant betting in terms of return on investment when the betting
proportion is a times the optimal betting proportion. Using (1.9), it can be
checked that h(O+)=1, h(l)=e-', and h(2-)=0. (We believe that h is
monotone decreasing on (0,2) but do not have a proof.) However, it would
probably be a mistake to regard this or (1.10) as an indictment of proportional
betting. As Wong (1981) put it (referring only to the optimal case),
'. . . proportional betting costs you about half of your arithmetic expectation.
You can think of this as being the premium you have to pay for the insurance
against going broke that you get with proportional betting.'
Up until now, we have assumed that XI, the bettor's net gain per unit bet, is
{ - 1, 1)-valued. This assumption, however, is unnecessary. In particular, (1.5)
and (1.8) hold with XI,X,, taken to be i.i.d. non-degenerate [ - 1,m>valued
random variables with positive (finite) expectation (assuming of course that
Elog(l+fX1)>O). As for (1.9) and (l.lO), we require for some M > O that
-
XI(&),X*(E), * be i.i.d. non-degenerate [ - 1,MI-valued random variables for
each E E [0, EO), that X l ( ~ ) a X 1 ( 0 as
) E +O+, and that E X l ( ~ ) > O >
566 s. N. ETHIER AND s. TAVAF&

E[X1(&)/(1+XI(&))]for 0 < E < co and EXl(0) = 0. (The boundedness assump-

tion on XI(&)is probably stronger than necessary but involves no real loss of
applicability.) In this case, (1.9) and (1.10) hold with R a ( & ) defined for E
sufficiently small by (1.7) and (1.2) with Xi = Xi (E) and f = a f * ( ~ )f,* ( ~ being
)
the choice of f that maximizes Elog(1 +fXl(s)), the exponential rate of growth
of the bettor's fortune. Clearly, these results generalize the previously stated
ones.
One of the best-known applications of proportional betting occurs in the game
of blackjack (Griffin (1981)). While it seems likely that the above results hold at
least qualitatively in this context, it should be recognized that several of our
assumptions fail to hold here. First, successive blackjack hands are not indepen-
dent unless separated by a shuffle. Second, successive hands are not identically
distributed from the card-counter's point of view; in particular, his advantage
fluctuates. Third, our requirement that X I Z -1 (i.e., the bettor cannot lose
more than the amount of his bet) seems to preclude the blackjack options of pair
splitting, doubling down, and insurance; however, by suitably rescaling, it it easy
to generalize the above results, replacing - 1 by an arbitrary negative constant.
Finally, we have assumed implicitly that money is infinitely divisible, which of
course is not the case in a gambling casino.

2. Asymptotic distribution of R. as n +m
Our first result concerns the random variable R defined by (1.7), though here
we do not assume (1.1).
Proposition 2.1. Let XI,X,, be i.i.d. non-degenerate [ - 1,m>valued ran-
dom variables with 0 < EX, < a. Fix f € (0,1] such that
(2.1) +
E log(1 fX1) > 0,

and let Fo be a positive constant. Define Fl,F,, -- -

by (1.2), R1, Rz, * by (1.4),
and R by (1.7).
(a) 0 < R < ess sup XI a s .
(b) R . A R as n+m. -
(c) There exists a random variable R ' (defined on the same probability space
that XI,X,, - 9
are defined on) such that R ' = R, R ' is independent of XI,
and

(2.2) R = (1 +fXI)R'/(l+ fR').

(d) ER < EX,.
Proof. (a) By the law of large numbers and (2.1),
lim
k-
(&/,)I" = lim
k-
exp{ - (l/k)log(K /Fo)}
+
= exp{ - E log(1 fX,)} < 1 as.,
Thc proportional bettor's ntwn on investment 567

so the series in (1.7) converges almost surely by the root test. Hence R > O
almost surely. For the second inequality, if esssup Xl = 00, there is nothing to
prove. If M = ess sup Xi< 00, then

with equality only if Xi = M for each i h 1. Hence the non-degeneracy of XI

implies that R < M almost surely.
(b) Observe that

as n +w, where the equality in distribution follows by reversing the order of

XI, X2,* .,Xn; we have also used Fn +m a s . as n +00, valid by (2.1).

(c) Define R ' in terms of Xz, - -

X3, exactly in the same way that R is defined
in terms of X17 -
Xz, * . Then

which is equivalent to (2.2).

(d) By (2.2), R 5 (1 +fXl)/f, and thus R has finite expectation. Now the
function *(r)= r/(l +f') is strictly concave on (O,w), so by (c) and Jensen's
hequality (using the non-degeneracy of Xland therefore R ),
ER = E[l +fXi]E[R/(l+ fR)] < (1 +fEXl)ER/(l +fER),
from which the desired result follows.
The next result will allow us to prove a generalization of (1.6).
Proposition 2.2. Let Xl,Xz,
* a, ---
f, Fo,Fl, Fz, , and R be as in Proposition
-
.,X, be [ - 1,w)-valued random variables, and
2.1. For each n h 1, let XI,,,
define
568 S. N. ETHIER AND S. TAVARfi

0
(2.6) (X~n,*.*,Xmn)- (X,,*.*,Xrn)as n+m, m 2 1 ,
(2.7) E(FdFmn)Y5 E(FdFm)Y, 1 5 Itl 5 n, O < u < 1.
0
Then R , - R as n+w.

Proof. As in (2.3), we infer from (2.5) that

so it will suffice to show that FdF,5 0 and

By (2.6), the latter will follow.from Theorem 4.2 of Billingsley (1968), provided
we can show that

(2.8) lim sup P

m- nBm+l
[2k-m+l
(FdFkn)Z 61 = O
for every 6 >O; the former will also be a consequence of (2.8). Now 4(t)=
Eexp( - t log(1 + fXl)) satisfies b(0)= 1 and d’(0)< 0, so there exists u E (0,l)
with 4 ( u ) < 1. Thus, the probability in (2.8) is bounded by

-
sa-” 2
k-m+l
E(FdFk)”=6-“ 2
k-m+l
4(U)k
S s - Y ~ ( U ) m + l-
/ (+l ( u ) )
for each n > m 2 1, where we have used (2.7). This implies (2.8) and completes
the proof.
Corollary 2.3. Let Xl, X2, * -,f, Fo,R1,Rz, * - and R be as in Proposition
2.1. Suppose in addition that 1 Z 2 and there exist distinct &, * .,6 E [ - 1, w)
-
such that pj = P{Xl = 5 )> 0 for j = 1, * ., 1 and Ei-lpj = 1. For each n 2 1, let
mln, * ., mln be non-negative integers summing to n, and put

An = [2 x{x,-e) = mjn, j = 1, * * *,

/n = pj for j = 1,
Assume that limn- m,,, a, I 0
1. Then Rn An+R as n +a.
-
Proof. For each n 2 1, let (XI,, .,X,,,,)have the conditional distribution of
(XI, - X,,)given A,,, and apply Proposition 2.2. Conditions (2.5) and (2.6) are
a,

easily checked, while (2.7) follows from Theorem 4 of Hoeffding (1963).

??le proportional benor’s retwn on inwshnent 569

3. Asymptotic distribution of R/EXl

The main result of this section specifies the asymptotic distribution of R/EXl
as the bettor’s advantage tends to 0.
Lemma 3.1. Let M and eo be positive constants. Let X1(c) be a non-
degenerate, [ - 1,MI-valued random variable for each E E [0, E ~ ) .Suppose that
X1(E)ZX1(0)as E + o + ,
(3.1) O<
EXI(E)>O>E[XI(E)/(~+XI(E))], E <EO,

where - 1/0= - m, and EXl(0)= 0. For 0 < E < E ~ define

,

G. (f) = Elog(1 +fXi(~)), O S f 5 1,

and ml(&)= EXI(&),m2(&)= EXl(E)2.
(a) For each E E (0, E ~ ) , G. (f) is strictly concave in f and has a unique
maximum at f = f * ( ~ )say, , in (0,l).
(b) f * ( ~=) r n l ( ~ ) m 2 ( ~ ) -+
l (o(1))
l as E d o + .
(c) For each a E(0,2), as E + O + ,
= af*(E)ml(E)(l -+a + o(1)).
G, (af*(~))
Proof. (a) Fix E E (0, E ~ ) .Since

G, (f) is strictly concave in f, G:(f)is strictly decreasing in f, and G:(O)> 0 >

G:(l-) by (3.1). Hence there exists a unique f * ( ~E) (0,l) with G:(f*(e))= 0;
clearly, this choice of f maximizes G.(f).
(b) First we claim that f*(&)+O as E + O +. Suppose not. Then there exists
~ . - - , 0 +with f * ( ~ . ) + f ~ E ( O , l ] .If f o < l then
,

by Jensen’s inequality, a contradiction. If fo = 1 the second equality in (3.2)

becomes an inequality ( 5 )and limn- is replaced by limsup.,,. Here we are
using Theorem 5.3 of Billingsley (1968) and the assumption that X1(&)is
bounded above by M. This establishes the claim. Now since G : ( ~ * ( E=)0,
) we
have
&(E)~
- f * ( ~ ) m 2 (+
~~) * ( E ) ~ E
1+f*(E)XI(E)= O
and hence

(3.3)
570 s. N. ETHIER AND s. TAVARB

for O < E < eo. The desired conclusion now follows from (3.3) and the initial
claim.
(c) By a Taylor expansion and (b), as E --* 0 + ,
G. (a!*(&))= Elog(l+ af*(~)Xi(~))
O(~*(E)~)
= af*(E)ml(E)-IaZf*(E)Zmz(&)+
= af* (E )m1( E ){ 1- laf* (E )ml(E )-' mz(E ) + o (1))
= af*(E)ml(E)(l -la + o(1)).
Zkorem 3.2. Let M, c0, and Fo be positive constants. Let X&), X&), *
be i.i.d. random variables for each E E [0, eo) with X1(e),0 5 E < eo, satisfying
the conditions of Lemma 3.1. Fix a E (0,2), and, using the notation of Lemma
3.1, define R " ( E )by (1.7) and (1.2) with Xi = X i ( & )and f = a f * ( ~for
) each
E E (0, eo) for which G, (af*(E)) > 0. (This is possible by Lemma 3.1 (c).) Then,
as E -+ 0 + ,(1.9) holds. Moreover, R"(E)/EXl(&) is uniformly integrable in E , so
(1.10) also holds.
Proof. Let E > 0 be such that G. (af*(~))
> 0, and denote the n th moment of
RP(&)by p , ( ~ for
) each n B 1. Let n B 1. By Proposition 2.l(c),
E(1+ Qlf*(E)X,(&))nE[R"(E)n/(l + a f * ( ~ ) R " ( ~ ) ) n ] .
p,(~)=
Since 1- nx 5 (1 + x)-" 5 1- nx + (";l)xZ for all x > 0, and since P,,+~5 MP,,+~,
we have

(1 + q ) ( p n - mf*b+l)
s /.tm 5 (1 + q ) [ pn - naf* (1 -+ ~ a f *p n)+ 1 }

where the dependence on E is implicit and where q = E(l +af*XJ' - 1.

Rearranging,
(3.4) plpn /my 5 pn+iImn1+ l =
.= pzpnIm Y,
where
p1= q/naf*ml(l + q),

Letting E -+ 0 + and noting that

q = naf*ml + (3azf*zmz+ ocf*3),

we conclude from Lemma 3.l(b) that both p1and p2converge to 1+ ((n - 1)/2)a.
By induction applied to (3.4) (using Proposition 2.l(d) for the initial step),
Ihc pmportional benor's return on investment 571

sup. p,, /m: < 00, and hence (R"/EXl)"is uniformly integrable in E for each n 2 1
(Billingsley (1968), p. 32). Also from (3.4), if lim,+,,+p,,/m; exists, then
lime4+ p,,+l/m;+l exists, and

(3.5) ;+I = (I
lim p , , + ~ m
r+o+
+n-l
2
a) j
k p,,/m ;.
Since R"/EXI is uniformly integrable in E,it is tight (Billingsley (1968), p. 41),
hence relatively compact. Let U be any weak limit as E + O + , so that
R"IEXl -% U as E + O + through some subsequence. Let v,, denote the nth
moment of U for each n 2 1. By the uniform integrability proved above,
p,,/m;+ v,, as E + O + through the subsequence for each n 2 1. By (3.9,

vn+l = (1 +n-l
2
a ) v,,, n 21.

Define 8 = 2 / a - 1 and A =2/a. Using (3.6), we find that U has Laplace

transform

Ee-IU=l+ (-t)"v,,/n!

=1+
-
n-1

( - t)"(e + n - 1)s- .(e + l)vl/h"-'n!

n-1

= [ Zo($(; e~) ] 5 v1+1-- h VI

e
= ( l + f ) - e $ + l -A- Y].
e
As t + m , this tends to l-(A/O)vl, which must therefore be non-negative.
Hence U is a mixture of gamma(@A ) and So, the unit mass concentrated at 0.
Let 0 < S < min(1, e). We claim that

(3.7) < 00.

lim sup E(R"(E)/EX](E))-'
#-bo+

Granting this for the moment, it follows that U must be purely gamma(8,A).
Since U was an arbitrary weak limit as E +0+ of R"(E)/EX](E), we conclude
that (1.9) holds as E +O+.
We turn to the proof of (3.7). As E + O + ,

E(1+ af*Xl)-* = 1 - &rf*mI fS(S + + 1)azf*zm2+ O(f*')

(3.8) = l-&rf*ml(l-f(S +l)af*m;'m2+o(l))
= 1 - &rf*ml(l-$(a + 1)a + o(1))
-

572 S. N. ETHIER AND S. TAVARh

by Lemma 3.l(b). Since 0 < S < 8, this is less than 1for all E sufliciently small. In
particular, for such E,

E(R")-' = (af*)"E (2 (FdFk))'

< 00.
Now by Proposition 2.l(c) (in particular, (2.4)),

E (')6 = E(1+ af*XJ6E (af*ml+')".

Using the inequality ( x + c ) 5

~ x 6 + &x'-', valid for all x > 0 and c > 0 (since
0 < 6 d l), and Proposition 2.l(d) together with Jensen's inequality, we find that

and hence
(3.9) E(R"/mJ8 5 Gaf*ml{l - E(1+ ~ r f * X ~ ) - ~ } - ' .
By (3.8), the right side of (3.9) tends to (1 - f ( G + l)a)-' as E -*O + ,pro\..ig (3.7)
and completing the proof.
Remark 3.3. We outline an alternative proof of (1.9), valid when XI(&) is
given by (1.1) with p = (1 + ~ ) / 2and somewhat more generally. By (3.7),
(R"(E)/EX,(E))-~(defined for E positive and sufliciently small) is uniformly
integrable in E, hence tight, and therefore relatively compact. Let V be an
arbitrary weak limit as E -* 0 + ,and denote its Laplace transform by + ( t ) , t L 0.
Using Proposition 2.l(c) (in particular, (2.4)), a Taylor expansion, and Lemma
3.l(b), we find that 4 satisfies the differential equation
(3.10) +
4att$"(t) (a- 1)4'(t) - 4(t)= 0, t > 0.
Moreover, 4 is monotone decreasing and +(O+) = 1. It follows from Grad-
shteyn and Ryzhik (1980), Equation 8.494(5), that

(3.11) 4 ( t )= q ~ t ) ~ ~ ~ ~ ( 2 V T t ) / r (t e>)0,,
Thc proportional 6ettor's return on investment 573

where 8 = 2/a - 1, A = 2/a, and KBis the (decreasing) modified Bessel function
of order 8. We conclude from Gradshteyn and Ryzhik (1980), Equation 3.471(9),
that 1/V is gamma(8,h). Since V was an arbitrary weak limit of
(R (&)/EXl(&))-' as E +0 + , the desired result follows.

Acknowledgements
We are grateful to Peter A. GrifEn for valuable correspondence and to
Thomas G. Kurtz and Stanford Wong for helpful suggestions.

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