Mean-Variance and Stochastic Dominance Analysis of Global Exchange-Traded Funds

Zhen Zhen Zhu, Wing Keung Wong*, Kok Fai Phoon

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review


    We employ the stochastic dominance (SD) approach that utilizes the entire return distribution to rank the performance of exchange-traded funds as traditional mean-variance and CAPM approaches may be inappropriate given the nature of non-normal returns. We find second and third-order stochastic dominance relationships amongst the assets and conclude that by investing in higher-order dominant funds, risk-averse investors can maximize their expected utilities but not their wealth. In addition, we find the common characteristic for most pairs of funds is that one fund is preferred to another in the negative domain whereas the preference reverses in the positive domain. We conclude that the stochastic dominance approach is more appropriate compared with traditional approaches as a filter in exchange-traded fund selection. Compared with traditional approaches, the SD approach, not only is assumption free, but also provides greater insights to the performance and risk inherent in an exchange-traded fund’s track record.
    Original languageEnglish
    Pages (from-to)30-55
    Number of pages26
    JournalFrontiers in Finance and Economics
    Issue number2
    Publication statusPublished - Dec 2015

    User-Defined Keywords

    • exchange-traded funds
    • stochastic dominance
    • risk-averse investors
    • performance measurement


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