Investigation and Test Algorithm of Stochastic Dominance for Evaluation of Optimum Portfolio Efficiency.
Subject Areas : Financial Knowledge of Securities Analysis
Parham Pedram
1
(
نویسنده اصلی و مسئول مکاتبه
)
Keywords: Performance of optimum portfol, Algorithm of stochastic
, 
, domi,
Abstract :
Concepts similar to stochastic dominance have been known for manyyears but the two papers published by Hadar and Russell, and Hanochand Levy in 1969, and the paper published by Rochschild and Stiglitz in1970 paved the way for a new paradigm called stochastic dominance,with hundreds of studies following in their tracks. These studies, dealwith theoretical as well as empirical issues in various areas of economics,finance, accounting, statistics, agriculture, and medicine.The need to develop the stochastic dominance rules stems fromparadoxes that are sometimes revealed by the commonly used meanvariancerule. To be more specific, there are cases in which a clear-cutchoice between two risky assets exists, yet the mean-variance rule isunable to rank the two alternate investments. Let us assume we have twoalternative investments: x providing $1 or $2 with equal probability and yproviding $2 or $4 with equal probability. A simple calculation showsthat both the mean and the variance of y are greater than thecorresponding parameters of x; hence the mean-variance rule remainssilent regarding the choice between x and y. Yet, any rational investorwould (and should) select y, because the lowest return on y is equal to thelargest return on x. Well, this is a trivial case in which the mean-variancerule fails to show the superiority of one investment over another.However, there are many more such cases in which the mean-variancerule is unable to rank two investments
