Reward-risk portfolio selection and stochastic dominance
Journal
Journal of Banking and Finance
ISSN
0378-4266
ISSN-Digital
1872-6372
Type
journal article
Date Issued
2005-04-01
Author(s)
Abstract
The portfolio selection problem is traditionally modelled by two different approaches. The first one is based on an axiomatic model of risk-averse preferences, where decision makers are assumed to possess a utility function and the portfolio choice consists in maximizing the expected utility over the set of feasible portfolios. The second approach, first proposed by Markowitz is very intuitive and reduces the portfolio choice to a set of two criteria, reward and risk, with possible tradeoff analysis. Usually the reward-risk model is not consistent with the first approach, even when the decision is independent from the specific form of the risk-averse expected utility function, i.e. when one investment dominates another one by second-order stochastic dominance. In this paper we generalize the reward-risk model for portfolio selection. We define reward measures and risk measures by giving a set of properties these measures should satisfy. One of these properties will be the consistency with second-order stochastic dominance, to obtain a link with the expected utility portfolio selection. We characterize reward and risk measures and we discuss the implication for portfolio selection.
Language
English
Keywords
stochastic dominance
coherent risk measure
decision under risk
mean-risk models
portfolio optimization
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Elsevier
Publisher place
Amsterdam
Volume
29
Number
4
Start page
895
End page
926
Pages
32
Subject(s)
Eprints ID
51180