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Portfolio Optimization With Stochastic Dominance Constraints

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Author Info
Darinka Dentcheva (Stevens Institute of Technology)
Andrzej Ruszczynski (Rutgers University)

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Abstract

We consider the problem of constructing a portfolio of finitely many assets whose returns are described by a discrete joint distribution. We propose a new portfolio optimization model involving stochastic dominance constraints on the portfolio return. We develop optimality and duality theory for these models. We construct equivalent optimization models with utility functions. Numerical illustration is provided.

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Paper provided by EconWPA in its series Finance with number 0402016.

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Date of creation: 19 Feb 2004
Date of revision: 02 Mar 2006
Handle: RePEc:wpa:wuwpfi:0402016

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Web page: http://129.3.20.41

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Related research
Keywords: portfolio optimization; stochastic dominance; risk; utility functions; duality;

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Find related papers by JEL classification:
G - Financial Economics

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hadar, Josef & Russell, William R, 1969. "Rules for Ordering Uncertain Prospects," American Economic Review, American Economic Association, vol. 59(1), pages 25-34, March. [Downloadable!] (restricted)
  2. Hanoch, G & Levy, Haim, 1969. "The Efficiency Analysis of Choices Involving Risk," Review of Economic Studies, Blackwell Publishing, vol. 36(107), pages 335-46, July. [Downloadable!] (restricted)
  3. Ogryczak, Wlodzimierz & Ruszczynski, Andrzej, 1999. "From stochastic dominance to mean-risk models: Semideviations as risk measures," European Journal of Operational Research, Elsevier, vol. 116(1), pages 33-50, July. [Downloadable!] (restricted)
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  4. Andrzej Ruszczynski & Robert J. Vanderbei, 2003. "Frontiers of Stochastically Nondominated Portfolios," Econometrica, Econometric Society, vol. 71(4), pages 1287-1297, 07. [Downloadable!] (restricted)
  5. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Darinka Dentcheva & Andrzej Ruszczynski, 2005. "Inverse stochastic dominance constraints and rank dependent expected utility theory," GE, Growth, Math methods 0503001, EconWPA. [Downloadable!]
  2. Laetitia Andrieu & Michel De Lara & Babacar Seck, 2008. "Conditional Value-at-Risk Constraint and Loss Aversion Utility Functions," Working Papers hal-00390836_v1, HAL. [Downloadable!]
  3. Laetitia Andrieu & Michel De Lara & Babacar Seck, 2009. "Conditional Value-at-Risk Constraint and Loss Aversion Utility Functions," Quantitative Finance Papers 0906.3425, arXiv.org. [Downloadable!]
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