Improved Portfolio Choice Using Second-Order Stochastic Dominance

Olga Kolokolova; Jens Carsten Jackwerth; James E Hodder

doi:10.1093/rof/rfu025

Improved Portfolio Choice Using Second-Order Stochastic Dominance

Olga Kolokolova, Jens Carsten Jackwerth, James E Hodder

A&F Accounting & Finance

Research output: Contribution to journal › Article › peer-review

Abstract

Constructing portfolios based on second-order stochastic dominance (SSD) is theoretically attractive since all risk-averse investors would prefer a dominating portfolio. However, choosing among SSD efficient portfolios is a challenge without an obvious ranking metric. We explore particular choices based on Kuosmanen (2004) plus Kopa and Post (2011), comparing their performance to other SSD-related strategies and to standard portfolio choice approaches. These SSD-related choices outperform portfolios chosen based on their Sharpe ratio, information ratio, or using equal weights. Portfolios based on minimum variance that also match the benchmark’s mean return perform on a par with the SSD-related choices.

Original language	English
Pages (from-to)	1623–1647
Journal	Review of Finance (Print)
Volume	19
Issue number	4
DOIs	https://doi.org/10.1093/rof/rfu025
Publication status	Published - 13 Jun 2014

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abstract = "Constructing portfolios based on second-order stochastic dominance (SSD) is theoretically attractive since all risk-averse investors would prefer a dominating portfolio. However, choosing among SSD efficient portfolios is a challenge without an obvious ranking metric. We explore particular choices based on Kuosmanen (2004) plus Kopa and Post (2011), comparing their performance to other SSD-related strategies and to standard portfolio choice approaches. These SSD-related choices outperform portfolios chosen based on their Sharpe ratio, information ratio, or using equal weights. Portfolios based on minimum variance that also match the benchmark{\textquoteright}s mean return perform on a par with the SSD-related choices.",

author = "Olga Kolokolova and Jackwerth, {Jens Carsten} and Hodder, {James E}",

year = "2014",

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N2 - Constructing portfolios based on second-order stochastic dominance (SSD) is theoretically attractive since all risk-averse investors would prefer a dominating portfolio. However, choosing among SSD efficient portfolios is a challenge without an obvious ranking metric. We explore particular choices based on Kuosmanen (2004) plus Kopa and Post (2011), comparing their performance to other SSD-related strategies and to standard portfolio choice approaches. These SSD-related choices outperform portfolios chosen based on their Sharpe ratio, information ratio, or using equal weights. Portfolios based on minimum variance that also match the benchmark’s mean return perform on a par with the SSD-related choices.

AB - Constructing portfolios based on second-order stochastic dominance (SSD) is theoretically attractive since all risk-averse investors would prefer a dominating portfolio. However, choosing among SSD efficient portfolios is a challenge without an obvious ranking metric. We explore particular choices based on Kuosmanen (2004) plus Kopa and Post (2011), comparing their performance to other SSD-related strategies and to standard portfolio choice approaches. These SSD-related choices outperform portfolios chosen based on their Sharpe ratio, information ratio, or using equal weights. Portfolios based on minimum variance that also match the benchmark’s mean return perform on a par with the SSD-related choices.

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JF - Review of Finance (Print)

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Improved Portfolio Choice Using Second-Order Stochastic Dominance

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