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Portfolio Optimization With Stochastic Dominance Constraints

Author

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  • Darinka Dentcheva

    (Stevens Institute of Technology)

  • Andrzej Ruszczynski

    (Rutgers University)

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.

Suggested Citation

  • Darinka Dentcheva & Andrzej Ruszczynski, 2004. "Portfolio Optimization With Stochastic Dominance Constraints," Finance 0402016, University Library of Munich, Germany, revised 02 Mar 2006.
    • Handle: RePEc:wpa:wuwpfi:0402016
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    References listed on IDEAS

    as
    1. G. Hanoch & H. Levy, 1969. "The Efficiency Analysis of Choices Involving Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 36(3), pages 335-346.
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    6. Andrzej Ruszczynski & Robert J. Vanderbei, 2003. "Frontiers of Stochastically Nondominated Portfolios," Econometrica, Econometric Society, vol. 71(4), pages 1287-1297, July.
    7. Darinka Dentcheva & Andrzej Ruszczynski, 2004. "Convexification of Stochastic Ordering," GE, Growth, Math methods 0402005, University Library of Munich, Germany, revised 05 Aug 2005.
    8. Darinka Dentcheva & Andrzej Ruszczynski, 2004. "Optimization Under First Order Stochastic Dominance Constraints," GE, Growth, Math methods 0403002, University Library of Munich, Germany, revised 07 Aug 2005.
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    More about this item

    Keywords

    portfolio optimization; stochastic dominance; risk; utility functions; duality;
    All these keywords.

    JEL classification:

    • G - Financial Economics

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