Improved Portfolio Choice Using Second-Order Stochastic Dominance

James E. Hodder, Jens Carsten Jackwerth and Olga Kolokolova

Review of Finance, 2015, vol. 19, issue 4, 1623-1647

Abstract: Constructing portfolios based on second-order stochastic dominance (SSD) is theoretically attractive since all risk-averse investors would prefer a dominating portfolio. However, choosing among SSD efficient portfolios is a challenge without an obvious ranking metric. We explore particular choices based on Kuosmanen (2004) plus Kopa and Post (2011), comparing their performance to other SSD-related strategies and to standard portfolio choice approaches. These SSD-related choices outperform portfolios chosen based on their Sharpe ratio, information ratio, or using equal weights. Portfolios based on minimum variance that also match the benchmark’s mean return perform on a par with the SSD-related choices.

Date: 2015
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Citations: View citations in EconPapers (33)

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Working Paper: Improved Portfolio Choice using Second-Order Stochastic Dominance (2010)
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