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Majorization Theory, Stochastic Dominance, and Preferences of Portfolios for Different Types of Investors

Author

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  • Guo, Xu
  • Egozcue, Martin
  • Wong, Wing-Keung

Abstract

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 completed and non-completed diversified portfolios and the preferences of different convex combinations of assets for investors with utility satisfying u(2)(x) ≥ (≤) − u(2)(−x) under some regularity conditions. This results could further make inference of the preferences of completed and non-completed diversified portfolios and the preferences of different convex combinations of assets for risk averters, risk lovers, and investors with prospect and Markowitz preferences under some conditions. We also note that it is easy to follow the approach used by Egozcue and Wong (2010) to get the results for the diversification preferences of non-iid assets for risk averters, risk lovers, and investors with prospect and Markowitz preference under some regularity conditions.

Suggested Citation

  • Guo, Xu & Egozcue, Martin & Wong, Wing-Keung, 2014. "Majorization Theory, Stochastic Dominance, and Preferences of Portfolios for Different Types of Investors," MPRA Paper 55390, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:55390
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    References listed on IDEAS

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    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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