Improved Portfolio Choice Using Second Order Stochastic Dominance

41 Pages Posted: 15 Jun 2009 Last revised: 25 Sep 2013

See all articles by James E. Hodder

James E. Hodder

Wisconsin School of Business

Jens Carsten Jackwerth

University of Konstanz - Department of Economics

Olga Kolokolova

University of Manchester - Alliance Manchester Business School

Date Written: September 19, 2013

Abstract

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.

Keywords: Second-Order Stochastic Dominance, Portfolio Choice, Out-of-Sample Performance, Portfolio Optimization, Performance Measurement

JEL Classification: G11, G23, G12, G13, G14

Suggested Citation

Hodder, James Ernest and Jackwerth, Jens Carsten and Kolokolova, Olga, Improved Portfolio Choice Using Second Order Stochastic Dominance (September 19, 2013). Available at SSRN: https://ssrn.com/abstract=1419926 or http://dx.doi.org/10.2139/ssrn.1419926

James Ernest Hodder

Wisconsin School of Business ( email )

975 University Avenue
Madison, WI 53706
United States
608-262-8774 (Phone)
608-263-0477 (Fax)

Jens Carsten Jackwerth (Contact Author)

University of Konstanz - Department of Economics ( email )

Universitaetsstr. 10
Konstanz, 78457
Germany
+497531882196 (Phone)
+497531883120 (Fax)

HOME PAGE: http://cms.uni-konstanz.de/wiwi/jackwerth/

Olga Kolokolova

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom
+441613062081 (Phone)

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