A Characterization of the SSD-Efficient Frontier of Portfolio Weights by Means of a Set of Mixed-Integer Linear Constraints
Management Science, Forthcoming
Posted: 22 Nov 2015
Date Written: June 15, 2015
In this paper the set of all second-order stochastic dominance (SSD) efficient portfolios is characterized by using a series of mixed-integer linear constrains. Our derivation employs a combination of the first-order conditions of the utility maximization problem together with a judicious use of binary variables. This result opens the door to the formulation of optimizations whose objective function is free to select a particular portfolio out of the entire SSD-efficient set.
Keywords: stochastic dominance, mixed-integer linear programming, portfolio theory
JEL Classification: C61, G10, G11
Suggested Citation: Suggested Citation