Portfolios Dominating Indices: Optimization with Second-Order Stochastic Dominance Constraints vs. Minimum and Mean Variance PortfoliosReport as inadecuate


Portfolios Dominating Indices: Optimization with Second-Order Stochastic Dominance Constraints vs. Minimum and Mean Variance Portfolios


Portfolios Dominating Indices: Optimization with Second-Order Stochastic Dominance Constraints vs. Minimum and Mean Variance Portfolios - Download this document for free, or read online. Document in PDF available to download.

1

Istanbul University, School of Business, Avcılar 34850, Istanbul, Turkey

2

Glushkov Institute of Cybernetics, Kyiv 03115, Ukraine

3

Department of Industrial and Systems Engineering, University of Florida, Gainesville, FL 32611, USA





*

Author to whom correspondence should be addressed.



Abstract The paper compares portfolio optimization with the Second-Order Stochastic Dominance SSD constraints with mean-variance and minimum variance portfolio optimization. As a distribution-free decision rule, stochastic dominance takes into account the entire distribution of return rather than some specific characteristic, such as variance. The paper is focused on practical applications of the portfolio optimization and uses the Portfolio Safeguard PSG package, which has precoded modules for optimization with SSD constraints, mean-variance and minimum variance portfolio optimization. We have done in-sample and out-of-sample simulations for portfolios of stocks from the Dow Jones, SandP 100 and DAX indices. The considered portfolios’ SSD dominate the Dow Jones, SandP 100 and DAX indices. Simulation demonstrated a superior performance of portfolios with SD constraints, versus mean-variance and minimum variance portfolios. View Full-Text

Keywords: stochastic dominance; stochastic order; portfolio optimization; portfolio selection; Dow Jones Index; SandP 100 Index; DAX index; partial moment; conditional value-at-risk; CVaR stochastic dominance; stochastic order; portfolio optimization; portfolio selection; Dow Jones Index; S&P 100 Index; DAX index; partial moment; conditional value-at-risk; CVaR





Author: Neslihan Fidan Keçeci 1, Viktor Kuzmenko 2 and Stan Uryasev 3,*

Source: http://mdpi.com/



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