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

Martin Egozcue; Wing Keung WONG

doi:10.1016/j.ejor.2009.01.007

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

Martin Egozcue, Wing Keung WONG^*

^*Corresponding author for this work

Department of Economics

Research output: Contribution to journal › Article › peer-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 language	English
Pages (from-to)	893-900
Number of pages	8
Journal	European Journal of Operational Research
Volume	200
Issue number	3
DOIs	https://doi.org/10.1016/j.ejor.2009.01.007
Publication status	Published - 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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10.1016/j.ejor.2009.01.007

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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.",

keywords = "Diversification, Expected utility, Majorization, Portfolio selection, Stochastic dominance",

author = "Martin Egozcue and WONG, {Wing Keung}",

note = "Funding Information: The authors are grateful to Professor Robert Graham Dyson and anonymous referees for substantive comments that have significantly improved this manuscript. The authors would also like to thank Professors Esfandiar Maasoumi, Harry M. Markowitz, and Franco Pellerey for valuable comments that have significantly improved this manuscript. Our deepest thanks also go to Professor Juan Dubra for his helpful comments and assistance with the paper. The second author would like to thank Professors Robert B. Miller and Howard E. Thompson for their continuous guidance and encouragement. This research is partially supported by grants from Universidad de la Republica del Uruguay and Hong Kong Baptist University. ",

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AB - 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.

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KW - Expected utility

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KW - Portfolio selection

KW - Stochastic dominance

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

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Scopus Subject Areas

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