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How does beta explain stochastic dominance efficiency?

  • Haim Shalit

    ()

  • Shlomo Yitzhaki

Stochastic 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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File URL: http://hdl.handle.net/10.1007/s11156-010-0167-2
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Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

Volume (Year): 35 (2010)
Issue (Month): 4 (November)
Pages: 431-444

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Handle: RePEc:kap:rqfnac:v:35:y:2010:i:4:p:431-444
Contact details of provider: Web page: http://springerlink.metapress.com/link.asp?id=102990

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  1. Shalit, Haim & Yitzhaki, Shlomo, 2002. " Estimating Beta," Review of Quantitative Finance and Accounting, Springer, vol. 18(2), pages 95-118, March.
  2. Shorrocks, Anthony F, 1983. "Ranking Income Distributions," Economica, London School of Economics and Political Science, vol. 50(197), pages 3-17, February.
  3. Yitzhaki, Shlomo, 1983. "On an Extension of the Gini Inequality Index," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 617-28, October.
  4. Haim Shalit & Shlomo Yitzhaki, 2003. "An Asset Allocation Puzzle: Comment," American Economic Review, American Economic Association, vol. 93(3), pages 1002-1008, June.
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  14. Haim Shalit & Shlomo Yitzhaki, 1994. "Marginal Conditional Stochastic Dominance," Management Science, INFORMS, vol. 40(5), pages 670-684, May.
  15. Darinka Dentcheva & Andrzej Ruszczynski, 2004. "Portfolio Optimization With Stochastic Dominance Constraints," Finance 0402016, EconWPA, revised 02 Mar 2006.
  16. Haim Shalit & Shlomo Yitzhaki, 2009. "Capital market equilibrium with heterogeneous investors," Quantitative Finance, Taylor & Francis Journals, vol. 9(6), pages 757-766.
  17. Hanoch, G & Levy, Haim, 1969. "The Efficiency Analysis of Choices Involving Risk," Review of Economic Studies, Wiley Blackwell, vol. 36(107), pages 335-46, July.
  18. Haim Levy, 1992. "Stochastic Dominance and Expected Utility: Survey and Analysis," Management Science, INFORMS, vol. 38(4), pages 555-593, April.
  19. Samuel Kotz & Christian Kleiber, 2002. "A characterization of income distributions in terms of generalized Gini coefficients," Social Choice and Welfare, Springer, vol. 19(4), pages 789-794.
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