Central Moments, Stochastic Dominance, Moment Rule, and Diversification
2 Pages Posted: 7 Aug 2019 Last revised: 1 Jun 2020
Date Written: August 4, 2019
In this paper, we develop some properties to state the relationships between the central moments and stochastic dominance for both the general utility functions and the polynomial utility functions. This leads to draw preferences of both risk averters and risk seekers on their choices of assets with different moments. In addition, we extend the mean-variance (mv) rule to get the moment rule which counts all moments in the decision. We apply the theory to portfolio diversification.
Keywords: Stochastic dominance, central moments, expected-utility maximization, risk aversion, risk seeking, investment behaviors, moment rule
JEL Classification: C00, G11
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