Gains from diversification on convex combinations: A majorization and stochastic dominance approach

Martin Egozcue, Wing Keung WONG*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

33 Citations (Scopus)

Abstract

By incorporating both majorization theory and stochastic dominance theory, this paper presents a general theory and a unifying framework for determining the diversification preferences of risk-averse investors and conditions under which they would unanimously judge a particular asset to be superior. In particular, we develop a theory for comparing the preferences of different convex combinations of assets that characterize a portfolio to give higher expected utility by second-order stochastic dominance. Our findings also provide an additional methodology for determining the second-order stochastic dominance efficient set.

Original languageEnglish
Pages (from-to)893-900
Number of pages8
JournalEuropean Journal of Operational Research
Volume200
Issue number3
DOIs
Publication statusPublished - 1 Feb 2010

Scopus Subject Areas

  • Computer Science(all)
  • Modelling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

User-Defined Keywords

  • Diversification
  • Expected utility
  • Majorization
  • Portfolio selection
  • Stochastic dominance

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