Growth–Security Models and Stochastic Dominance

Leonard C. MacLean (), Yonggan Zhao () and William T. Ziemba ()
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Leonard C. MacLean: Dalhousie University
Yonggan Zhao: Dalhousie University
William T. Ziemba: University of British Columbia

Chapter Chapter 13 in Stochastic Programming, 2010, pp 277-296 from Springer

Abstract: Abstract The accumulated wealth from investment in risky assets is a random variable. If investment strategies are to be ordered, so that one is preferred to another, then the ordering of random variables is required. In this paper the levels of stochastic dominance for random variables are used to define bi-criteria problems for determining an efficient investment strategy. The criteria are characterized as growth and security, respectively, and produce an ordering of strategies consistent with stochastic dominance. In the case where the dynamics of asset returns follow geometric Brownian motion in continuous time, the efficient strategies are shown to be proportional to the growth optimum or Kelly strategy. The analogous problem in discrete time requires solving a stochastic program. An example is provided which compares the continuous and discrete time solutions.

Keywords: Asset Price; Planning Horizon; Investment Strategy; Risky Asset; Stochastic Dominance (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1007/978-1-4419-1642-6_13

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