Improved Portfolio Choice Using Second-Order Stochastic Dominance* | Zendy

James E. Hodder | Zendy; Jens Carsten Jackwerth | Zendy; Olga Kolokolova | Zendy

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Improved Portfolio Choice Using Second-Order Stochastic Dominance*

Author(s) -

James E. Hodder,

Jens Carsten Jackwerth,

Olga Kolokolova

Publication year - 2014

Publication title -

european finance review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.933

H-Index - 61

eISSN - 1573-692X

pISSN - 1382-6662

DOI - 10.1093/rof/rfu025

Subject(s) - stochastic dominance , sharpe ratio , portfolio , ranking (information retrieval) , econometrics , metric (unit) , computer science , information ratio , benchmark (surveying) , order (exchange) , performance metric , mathematical optimization , economics , mathematics , financial economics , machine learning , finance , operations management , management , geodesy , geography

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 a particular choice based on Kuosmanen (2004) and compare its performance to other SSD-related strategies and to standard portfolio choice approaches. The SSD-related choices (including the Kuosmanen approach) outperform portfolios based on the Sharpe ratio, equal weights, and the information ratio. Portfolios based on minimum variance that also match the benchmark’s mean return perform on a par with the SSD-related choices.

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