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Marginal Conditional Stochastic Dominance

  • Haim Shalit

    (Department of Economics, Ben Gurion University of the Negev, Beer-Sheva, Israel)

  • Shlomo Yitzhaki

    (Department of Economics, Hebrew University of Jerusalem, Jerusalem, Israel)

This paper introduces the concept of Marginal Conditional Stochastic Dominance (MCSD), which states the conditions under which all risk-averse individuals, when presented with a given portfolio, prefer to increase the share of one risky asset over that of another. MCSD rules also answer the question of whether all risk-averse individuals include a new asset in their portfolio when assets' returns are correlated. MCSD criteria are expressed in terms of the probability distributions of the assets and of the underlying portfolio. An empirical application of MCSD is provided using stocks traded on the New York Stock Exchange. MCSD rules are used to show that, in the long run, one cannot assert that the market portfolio is inefficient.

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Article provided by INFORMS in its journal Management Science.

Volume (Year): 40 (1994)
Issue (Month): 5 (May)
Pages: 670-684

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Handle: RePEc:inm:ormnsc:v:40:y:1994:i:5:p:670-684
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