---
title: The Conviction Fraction
slug: conviction-fraction
url: https://templeton.host/lexicon/conviction-fraction/
type: defined-term
inDefinedTermSet: https://templeton.host/lexicon
author: Andrew Templeton
---

# The Conviction Fraction

## Definition

f* = (mu - r) / (gamma x sigma^2). The fraction of capital you commit to a bet: the edge over the hurdle, divided by risk aversion times variance. It is the Merton optimal risky-asset weight under CRRA utility; the Kelly criterion is the special case where risk aversion goes to 1 (log utility). A bigger edge or tighter evidence raises the size; more variance or more caution shrinks it.

## Why this term exists

The Scientist produces the posterior - the estimate of the edge, the variance, and the tails. The Allocator supplies the risk aversion - how much of that conviction to turn into position size. Together they answer the only question left once you have an edge: how big. Size the position to the strength of the evidence, not the strength of the feeling.

## See also

- [The Performance Frontier](https://templeton.host/frameworks/performance-frontier)
- [Dollarized Confusion Matrix](https://templeton.host/tools/dollarized-confusion-matrix)
- [Oracle Gradient](https://templeton.host/lexicon/oracle-gradient)
- [Causal Yield](https://templeton.host/lexicon/causal-yield)
- [Portfolio Alpha](https://templeton.host/lexicon/portfolio-alpha)

Canonical URL: https://templeton.host/lexicon/conviction-fraction/