How does beta explain stochastic dominance efficiency?
AbstractStochastic dominance rules provide necessary and sufficient conditions for characterizing efficient portfolios that suit all expected utility maximizers. For the finance practitioner, though, these conditions are not easy to apply or interpret. Portfolio selection models like the mean-variance model offer intuitive investment rules that are easy to understand, as they are based on parameters of risk and return. We present stochastic dominance rules for portfolio choices that can be interpreted in terms of simple financial concepts of systematic risk and mean return. Stochastic dominance is expressed in terms of Lorenz curves, and systematic risk is expressed in terms of Gini. To accommodate risk aversion differentials across investors, we expand the conditions using the extended Gini.
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Bibliographic InfoArticle provided by Springer in its journal Review of Quantitative Finance and Accounting.
Volume (Year): 35 (2010)
Issue (Month): 4 (November)
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Web page: http://springerlink.metapress.com/link.asp?id=102990
Systematic risk; Gini; Extended Gini; Marginal conditional stochastic dominance; Lorenz curves; G11;
Other versions of this item:
- Haim Shalit & Shlomo Yitzhaki, 2008. "How Does Beta Explain Stochastic Dominance Efficiency?," Working Papers 0813, Ben-Gurion University of the Negev, Department of Economics.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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