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A Note on Asset Proportions, Stochastic Dominance, and the 50% Rule

Author

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  • Ephraim Clark

    (Middlesex University Business School, The Burroughs, London NW4 4BT, United Kingdom)

  • Octave Jokung

    (EDHEC Graduate School of Management, Catholic University, Lille, France)

Abstract

In this note we analyze the composition of an optimal portfolio by considering the cumulative conditional expected outcome of two dependent assets. We develop a conditional stochastic dominance relation and show that for any concave von Neumann-Morgenstern utility function, the proportion of wealth invested in the dominant asset will be greater than 50%.

Suggested Citation

  • Ephraim Clark & Octave Jokung, 1999. "A Note on Asset Proportions, Stochastic Dominance, and the 50% Rule," Management Science, INFORMS, vol. 45(12), pages 1724-1727, December.
    • Handle: RePEc:inm:ormnsc:v:45:y:1999:i:12:p:1724-1727
    DOI: 10.1287/mnsc.45.12.1724
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    References listed on IDEAS

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    1. Peter C. Fishburn, 1978. "Stochastic Dominance Without Transitive Preferences," Management Science, INFORMS, vol. 24(12), pages 1268-1277, August.
    2. Masaaki Kijima & Masamitsu Ohnishi, 1996. "Portfolio Selection Problems Via The Bivariate Characterization Of Stochastic Dominance Relations1," Mathematical Finance, Wiley Blackwell, vol. 6(3), pages 237-277, July.
    3. Josef Hadar & Tae Kun Seo, 1988. "Asset Proportions in Optimal Portfolios," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(3), pages 459-468.
    4. Landsberger, Michael & Meilijson, Isaac, 1990. "Demand for risky financial assets: A portfolio analysis," Journal of Economic Theory, Elsevier, vol. 50(1), pages 204-213, February.
    5. Paul L. McEntire, 1984. "Portfolio Theory for Independent Assets," Management Science, INFORMS, vol. 30(8), pages 952-963, August.
    6. Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March.
    7. Masaaki Kijima, 1997. "The Generalized Harmonic Mean And A Portfolio Problem With Dependent Assets," Theory and Decision, Springer, vol. 43(1), pages 71-87, July.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Zhuo Qiao & Ephraim Clark & Wing-Keung Wong, 2014. "Investors’ preference towards risk: evidence from the Taiwan stock and stock index futures markets," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 54(1), pages 251-274, March.
    2. Clark, Ephraim & Jokung, Octave & Kassimatis, Konstantinos, 2011. "Making inefficient market indices efficient," European Journal of Operational Research, Elsevier, vol. 209(1), pages 83-93, February.
    3. Belghitar, Yacine & Clark, Ephraim & Deshmukh, Nitin, 2014. "Does it pay to be ethical? Evidence from the FTSE4Good," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 54-62.
    4. Ephraim Clark & Konstantinos Kassimatis, 2013. "International equity flows, marginal conditional stochastic dominance and diversification," Review of Quantitative Finance and Accounting, Springer, vol. 40(2), pages 251-271, February.
    5. Clark, Ephraim & Kassimatis, Konstantinos, 2011. "An alternative measure of the "world market portfolio": Determinants, efficiency, and information content," Journal of International Money and Finance, Elsevier, vol. 30(5), pages 724-748, September.
    6. Michel Denuit & Louis Eeckhoudt, 2016. "Risk aversion, prudence, and asset allocation: a review and some new developments," Theory and Decision, Springer, vol. 80(2), pages 227-243, February.
    7. Takao Asano & Yusuke Osaki, 2017. "Portfolio Allocation Problems between Risky Ambiguous Assets," KIER Working Papers 975, Kyoto University, Institute of Economic Research.
    8. Dachraoui, K. & Dionne, G., 2000. "Optimal Financial Portfolio and Dependence of Risky Assets," Ecole des Hautes Etudes Commerciales de Montreal- 00-12, Ecole des Hautes Etudes Commerciales de Montreal-Chaire de gestion des risques..
    9. Yacine Belghitar & Ephraim A. Clark, 2012. "The Effect of CEO Risk Appetite on Firm Volatility: An Empirical Analysis of Financial Firms☆," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 19(2), pages 195-211, July.
    10. Yacine Belghitar & Ephraim Clark & Nitin Deshmukh, 2017. "Importance Of The Fund Management Company In The Performance Of Socially Responsible Mutual Funds," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 40(3), pages 349-367, September.
    11. Clark, Ephraim & Kassimatis, Konstantinos, 2014. "Exploiting stochastic dominance to generate abnormal stock returns," Journal of Financial Markets, Elsevier, vol. 20(C), pages 20-38.
    12. Takao Asano & Yusuke Osaki, 2020. "Portfolio allocation problems between risky and ambiguous assets," Annals of Operations Research, Springer, vol. 284(1), pages 63-79, January.
    13. Belghitar, Yacine & Clark, Ephraim & Kassimatis, Konstantino, 2011. "The prudential effect of strategic institutional ownership on stock performance," International Review of Financial Analysis, Elsevier, vol. 20(4), pages 191-199, August.
    14. Clark, Ephraim & Kassimatis, Konstantinos, 2012. "An empirical analysis of marginal conditional stochastic dominance," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1144-1151.

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