A General Test for SSD Portfolio Efficiency

36 Pages Posted: 28 Apr 2011 Last revised: 1 Jul 2015

See all articles by Milos Kopa

Milos Kopa

Charles University in Prague - Faculty of Mathematics and Physics

Thierry Post

Graduate School of Business of Nazarbayev University

Date Written: April 27, 2011

Abstract

We develop a Linear Programming test to analyze if a given investment portfolio is efficient in terms of second-order stochastic dominance relative to all possible portfolios formed from a set of base assets. The test has a convenient Linear Programming structure. In case of efficiency, the primal model identifies a subgradient vector of a utility function that rationalizes the evaluated portfolio. In case of inefficiency, the dual model identifies a second, efficient portfolio that dominates the evaluated portfolio. The test gives a general necessary and sufficient condition, and can deal with general linear portfolio restrictions, inefficiency degree measures, and scenarios with unequal probabilities. We also develop a compact version of the test that substantially reduces computational burden at the cost of losing information about the dual dominating portfolio in case of inefficiency. An application to US investment benchmark data qualifies a broad stock market index as inefficient, and suggests that no risk-averse investor would hold the market index in the face of attractive premiums offered by some more concentrated investment portfolios.

Keywords: stochastic dominance, portfolio analysis, portfolio diversification, linear programming

JEL Classification: D81, G11

Suggested Citation

Kopa, Milos and Post, Thierry, A General Test for SSD Portfolio Efficiency (April 27, 2011). OR Spectrum, Vol. 37, No. 3, 2015, 703-734, Available at SSRN: https://ssrn.com/abstract=1824174 or http://dx.doi.org/10.2139/ssrn.1824174

Milos Kopa (Contact Author)

Charles University in Prague - Faculty of Mathematics and Physics ( email )

Sokolovska 83
Prague, 186 75
Czech Republic

Thierry Post

Graduate School of Business of Nazarbayev University ( email )

53 Kabanbay Batyra Avenue
Astana, 010000
Kazakhstan

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
142
Abstract Views
1,017
rank
225,693
PlumX Metrics