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Gains from diversification on convex combinations: A majorization and stochastic dominance approach

  • Egozcue, Martin
  • Wong, Wing-Keung

By incorporating both majorization theory and stochastic dominance theory, this paper presents a general theory and a unifying framework for determining the diversification preferences of risk-averse investors and conditions under which they would unanimously judge a particular asset to be superior. In particular, we develop a theory for comparing the preferences of different convex combinations of assets that characterize a portfolio to give higher expected utility by second-order stochastic dominance. Our findings also provide an additional methodology for determining the second-order stochastic dominance efficient set.

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Article provided by Elsevier in its journal European Journal of Operational Research.

Volume (Year): 200 (2010)
Issue (Month): 3 (February)
Pages: 893-900

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Handle: RePEc:eee:ejores:v:200:y:2010:i:3:p:893-900
Contact details of provider: Web page: http://www.elsevier.com/locate/eor

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