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Almost Stochastic Dominance and Efficient Investment Sets
Jerusalem School of Business, The Hebrew University, Jerusalem, Israel
- 1 Jerusalem School of Business, The Hebrew University, Jerusalem, Israel
American Journal of Operations Research·Volume 02 (2012)·Pages 313–321·Published 18 September 2012·DOI10.4236/ajor.2012.23038
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Abstract
A major drawback of Mean-Variance and Stochastic Dominance investment criteria is that they may fail to determine dominance even in situations when all “reasonable” decision-makers would clearly prefer one alternative over another. Leshno and Levy [1] suggest Almost Stochastic Dominance (ASD) as a remedy. This paper develops algorithms for deriving the ASD efficient sets. Empirical application reveals that the improvement to the efficient sets implied by ASD is substantial (64% reduction for FSD). Direct expected utility maximization shows that investment portfolios excluded from the ASD efficient set would not have been chosen by any investors with reasonable preferences.
KeywordsStochastic DominanceEfficient Investment SetInvestment Choice
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