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Ranking Investments Using the Lorenz Curve

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  • Doron Nisani

    (Ben-Gurion University of the Negev)

Abstract

Ranking investments is important for measuring the performance of financial assets over a period of time. The Mean-Variance Model (MV Model) suggests the Reward-to-Variability Index (Sharpe Index) for ranking the performances of investments. However, this model is based on the implicit assumption that the investments’ rate of return is normally distributed. This assumption highlights the importance of a diverse portfolio, but is rarely satisfied. The most accurate method of ranking investments is according to the investor’s preference ratio, described by the stochastic dominance rules (SD Rules). The SD Rules are coherent with the generic properties of the investor’s preference, but their main disadvantage lies in their complex calculations. This paper presents a new method of ranking investments using the Lorenz curve, thus utilizing the investor’s preference ratio ranking and the simplicity of applying the Lorenz curve so as to describe a full order of ranking according to the investor’s behavior.

Suggested Citation

  • Doron Nisani, 2019. "Ranking Investments Using the Lorenz Curve," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 17(1), pages 1-9, March.
    • Handle: RePEc:spr:jqecon:v:17:y:2019:i:1:d:10.1007_s40953-018-0121-z
    DOI: 10.1007/s40953-018-0121-z
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    References listed on IDEAS

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    Cited by:

    1. Doron Nisani & Amit Shelef, 2021. "A statistical analysis of investor preferences for portfolio selection," Empirical Economics, Springer, vol. 61(4), pages 1883-1915, October.
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    3. Doron Nisani, 2023. "On the General Deviation Measure and the Gini coefficient," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(3), pages 599-610, September.

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    More about this item

    Keywords

    Investment management; Stochastic dominance; Lorenz curve; Gini Index;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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