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Checklist, in Backtesting & Validation

Position Sizing Review Checklist

Sizing decides whether a real edge compounds or a sampling fluke wipes you out. This checklist reviews how much to bet given a signal, separate from whether the signal is any good.

12 items. Published May 26, 2026. By AI Fin Hub Research.

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Sections

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Section 1

Phase 1: Honest inputs

3 items

Use the Position Sizing under Edge Variance: Bayesian-Kelly bet sizing when your edge is itself uncertain. Compare deterministic Kelly, Bayesian-adjusted, and conservative lower-bound versions.

Section 2

Phase 2: Kelly discipline

3 items

Use the Kelly Criterion Calculator: Size positions with full, half, quarter, or eighth Kelly and stress-test the choice with a drawdown Monte Carlo simulator. Client-side. Private by default.

Section 3

Phase 3: Portfolio-level limits

3 items

Use the Portfolio Correlation Matrix: Paste a multi-asset returns CSV. See the Pearson correlation heatmap, condition number, average absolute correlation, and eigenvalue concentration.

Section 4

Phase 4: Drawdown stress

3 items

Use the Drawdown-Recovery Markov Simulator: Time to recover from an N% drawdown given monthly Sharpe + skew + kurtosis. Cornish-Fisher Monte Carlo, percentile distribution of recovery months.

Tips

Small moves that make the checklist easier to finish

Kelly is exquisitely sensitive to the edge estimate, and the estimate is always too optimistic. Betting a fraction is not timidity, it is the correction for the error you cannot see.
Correlated positions are one bet in a crisis, even if they look like ten in calm markets. Size the cluster, not just the individual line.
Look at the drawdown distribution, not the average return. You will live through the path, and a strategy you cannot psychologically hold is a strategy you will abandon at the worst moment.

Sources

  1. A New Interpretation of Information Rate (Kelly Criterion) , J. L. Kelly Jr., Bell System Technical Journal (1956)
  2. The Kelly Capital Growth Investment Criterion , MacLean, Thorp, Ziemba (eds.), World Scientific (2011)

Keep the topic connected

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  • Learn Kelly Criterion

    What the Kelly criterion is, when full Kelly blows up, and why most working quants size at half- or quarter-Kelly.

  • Learn Drawdown

    Drawdown explained: peak-to-trough decline, why max drawdown alone is misleading, and the recovery math that actually matters.

  • Learn Volatility

    Volatility as the standard deviation of returns: realized vs implied, the annualization gotcha, and why volatility-of-volatility matters.