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

    40 Citations (Scopus)
    1 Downloads (Pure)

    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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