Almost Stochastic Dominance and Efficient Investment Sets

Moshe Levy

Jerusalem School of Business, The Hebrew University, Jerusalem, Israel.

DOI: 10.4236/ajor.2012.23038                

Abstract

A major drawback of Mean-Variance and Stochastic Dominance investment criteria is that they may fail to determine dominance even in situations when all “reasonable” decision-makers would clearly prefer one alternative over another. Leshno and Levy [1] suggest Almost Stochastic Dominance (ASD) as a remedy. This paper develops algorithms for deriving the ASD efficient sets. Empirical application reveals that the improvement to the efficient sets implied by ASD is substantial (64% reduction for FSD). Direct expected utility maximization shows that investment portfolios excluded from the ASD efficient set would not have been chosen by any investors with reasonable preferences.

Keywords

Stochastic Dominance; Efficient Investment Set; Investment Choice

Conflicts of Interest

The authors declare no conflicts of interest.

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