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.
European Journal of Operational Research
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Link to Publisher’s Edition
Majorization, Stochastic dominance, Portfolio selection, Expected utility, Diversification
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.