How Does Beta Explain Stochastic Dominance Efficiency?

Haim Shalit and Shlomo Yitzhaki

No 813, Working Papers from Ben-Gurion University of the Negev, Department of Economics

Abstract: Stochastic dominance rules provide necessary and sufficient conditions for characterizing efficient portfolios that suit all expected utility maximizers. For the finance practitioner, though, these conditions are not easy to apply or interpret. Portfolio selection models like the mean-variance model offer intuitive investment rules that are easy to understand, as they are based on parameters of risk and return. We present stochastic dominance rules for portfolio choices that can be interpreted in terms of simple financial concepts of systematic risk and mean return. Stochastic dominance is expressed in terms of Lorenz curves, and systematic risk is expressed in terms of Gini. To accommodate risk aversion differentials across investors, we expand the conditions using the extended Gini.

Keywords: Systematic Risk; Gini; Extended Gini; Marginal Conditional Stochastic Dominance; Lorenz Curves (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2008
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Journal Article: How does beta explain stochastic dominance efficiency? (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:bgu:wpaper:0813

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