How does beta explain stochastic dominance efficiency?

How does beta explain stochastic dominance efficiency? Stochastic dominance rules provide necessary and sufficient conditions for characterizing efficient portfolios that suit all expected utility maximizers. For the finance practitioner, though, these conditions are not easy to apply or interpret. Portfolio selection models like the mean–variance model offer intuitive investment rules that are easy to understand, as they are based on parameters of risk and return. We present stochastic dominance rules for portfolio choices that can be interpreted in terms of simple financial concepts of systematic risk and mean return. Stochastic dominance is expressed in terms of Lorenz curves, and systematic risk is expressed in terms of Gini. To accommodate for risk aversion differentials across investors, we expand the conditions using the extended Gini. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

How does beta explain stochastic dominance efficiency?

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Publisher
Springer US
Copyright
Copyright © 2010 by Springer Science+Business Media, LLC
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-010-0167-2
Publisher site
See Article on Publisher Site

Abstract

Stochastic dominance rules provide necessary and sufficient conditions for characterizing efficient portfolios that suit all expected utility maximizers. For the finance practitioner, though, these conditions are not easy to apply or interpret. Portfolio selection models like the mean–variance model offer intuitive investment rules that are easy to understand, as they are based on parameters of risk and return. We present stochastic dominance rules for portfolio choices that can be interpreted in terms of simple financial concepts of systematic risk and mean return. Stochastic dominance is expressed in terms of Lorenz curves, and systematic risk is expressed in terms of Gini. To accommodate for risk aversion differentials across investors, we expand the conditions using the extended Gini.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Feb 13, 2010

References

  • Expected earnings growth and portfolio performance
    Best, RW; Hodges, CW; Yoder, JA
  • The estimation of systematic risk under differentiated risk aversion: a mean-extended Gini approach
    Gregory-Allen, RB; Shalit, H

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