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, M., & Wong, W. (2010). Gains from diversification on convex combinations: A majorization and stochastic dominance approach. European Journal of Operational Research, 200 (3). https://doi.org/10.1016/j.ejor.2009.01.007