Department of Economics
By incorporating both majorization theory and stochastic dominance theory, this paper presents a general theory and a unifying framework for determining the diversification preferences of risk-averse investors and conditions under which they would unanimously judge a particular asset to be superior. In particular, we develop a theory for comparing the preferences of different convex combinations of assets that characterize a portfolio to give higher expected utility by second-order stochastic dominance. Our findings also provide an additional methodology for determining the second-order stochastic dominance efficient set.
Majorization, Stochastic dominance, Portfolio selection, Expected utility, Diversification
Source Publication Title
European Journal of Operational Research
Link to Publisher's Edition
Egozcue, Martin, and Wing Keung Wong. "Gains from diversification on convex combinations: A majorization and stochastic dominance approach." European Journal of Operational Research 200.3 (2010): 893-900.