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Stochastic Dominance and Optimal Portfolio

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  • K. Dachraoui
  • G. Dionne

Abstract

We analyze the effect of generalized first and second order stochastic dominance changes in a returns distribution on optimal financial portfolios with two risky and a risk free assets. We show that constant relative risk aversion plays an important role in explaining how the composition of the portfolios is affected. The results are interpreted in terms of two-fund separation.
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Suggested Citation

  • K. Dachraoui & G. Dionne, 2001. "Stochastic Dominance and Optimal Portfolio," THEMA Working Papers 2001-01, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    • Handle: RePEc:ema:worpap:2001-01
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    File URL: http://www.u-cergy.fr/IMG/documents//2001-01Dionne.pdf
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    References listed on IDEAS

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    1. Dachraoui, K. & Eeeckhoudt, L. & Godfroid.P., 1999. "Proper Risk Behavior," Ecole des Hautes Etudes Commerciales de Montreal- 99-01, Ecole des Hautes Etudes Commerciales de Montreal-Chaire de gestion des risques..
    2. Eeckhoudt,L. & Gollier, C., 1997. "Changing in Risk and Risk Taking: A Survey," Papers 97.472, Toulouse - GREMAQ.
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    5. Dachraoui, Kais & Dionne, Georges & Eeckhoudt, Louis & Godfroid, Philippe, 1999. "Proper risk behavior," Working Papers 99-1, HEC Montreal, Canada Research Chair in Risk Management.
      • K. Dachraoui & G. Dionne & L. Eeckhoudt & P. Godfroid, 1999. "Proper risk behavior," THEMA Working Papers 99-27, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
      • Dachraoui, K. & Dionne, G. & Eeckhoudt, L. & Godfroid, P., 1999. "Proper Risk Behavior," Papers 99-27, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
    6. Eeckhoudt, Louis & Gollier, Christian & Schlesinger, Harris, 1996. "Changes in Background Risk and Risk-Taking Behavior," Econometrica, Econometric Society, vol. 64(3), pages 683-689, May.
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    8. Dionne, Georges & Gollier, Christian, 1996. "A Model of Comparative Statics for Changes in Stochastic Returns with Dependent Risky Assets," Journal of Risk and Uncertainty, Springer, vol. 13(2), pages 147-162, September.
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    10. Meyer, Jack & Ormiston, Michael B, 1985. "Strong Increases in Risk and Their Comparative Statics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 425-437, June.
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    Cited by:

    1. Anissa Chaibi & Maria-Lenuta Ciupac-Ulici & Mircea-Cristian Gherman, 2014. "Do Recent Stochastic Tools Help to Better Understand Investors Preference and Asset Allocation?," Working Papers 2014-130, Department of Research, Ipag Business School.
    2. Enrique Ballestero & David Pla-Santamaria, 2005. "Grading the performance of market indicators with utility benchmarks selected from Footsie: a 2000 case study," Applied Economics, Taylor & Francis Journals, vol. 37(18), pages 2147-2160.

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    More about this item

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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