ABSTRACT
This chapter considers the actions of an expected utility maximizing investor who operates in horse race environments. It explores the unconditional discrete horse race, the conditional discrete horse race, an unconditional “continuous,” and, a conditional horse race where the probabilities of the various states can be described by a mixture of density functions and point masses. The chapter discusses the compatibility of the horse race and the investor’s utility function, optimal allocation for general utility functions, horse races with homogeneous returns, the Kelly investor, generalized logarithmic utility functions, and the power utility. It shows that horse races with homogeneous returns are particularly tractable. The chapter focuses on a still more general horse race, where the probability of various outcomes can be described by a conditional density model which may include point masses.
