Efficient Diversification According to Stochastic Dominance Criteria

Efficient Diversification According to Stochastic Dominance Criteria

T paper develops the first operational tests of portfolio efficiency based on the general stochastic dominance (SD) criteria that account for an infinite set of diversification strategies. The main insight is to preserve the cross-sectional dependence of asset returns when forming portfolios by reexpressing the SD criteria in T -dimensional Euclidean space, with elements representing rates of r...

Decision criteria in risk analysis : an application of stochastic dominance with respect to a function

Testing for Third-Order Stochastic Dominance with Diversification Possibilities

We derive an empirical test for third-order stochastic dominance that allows for diversification between choice alternatives.The test can be computed using straightforward linear programming. Bootstrapping techniques and asymptotic distribution theory can approximate the sampling properties of the test results and allow for statistical inference. Our approach is illustrated using real-life US s...

Diversification benefits of commodities: A stochastic dominance efficiency approach

We revisit the question whether commodities should be included in investors' portfolios. We employ for the first time a stochastic dominance efficiency (SDE) approach to construct optimal portfolios with and without commodities and we evaluate their comparative performance. SDE circumvents the necessity to posit a specific utility function to describe investor's preferences and it does not impo...

Effi cient Diversification under Generalized Almost Stochastic Dominance

Stochastic dominance (SD) has been identified as an important method for effi cient diversification. However, the SD rule is too rigid in that it remains silent on some obvious preferences between two distributions for most investors as pointed out by Leshno and Levy (2002). Thus the purpose of this paper is to derive an effi cient frontier according to generalized almost stochastic dominance (...