Investing in March Madness: An Examination of The Relationship Between Sports Betting and Portfolio Construction

Abstract

This study focuses on three basic ideas: (1) sports betting should be considered an asset class; (2) sports betting contests, with two teams or contenders, are well described by a recently introduced probability distribution, the generalized Poisson binomial (GPB) distribution; and (3) Modern Portfolio Theory (MPT), Post-Modern Portfolio Theory (PMPT), and the Kelly criterion can be applied to yield optimal risk-return portfolios in such two contender environments. For the PMPT application, a unique quadratic-binary programming model is developed. March Madness data, based on the NCAA men’s annual championship basketball tournament, will provide examples of these portfolio theory approaches.