Abstrakt
This paper deals with portfolio efficiency testing with respect to higher order stochastic dominance criteria. Firstly, we test the second- order stochastic dominance (SSD) portfolio efficiency, that allows for risk averse decision makers, for portfolios from a regular grid.
The grid is created from one- month US Treasury bill (a riskless asset) and 10 representative value-weighted active benchmark stock portfolios. They are formed, and annually rebalanced, based on individual stocks' market capitalization of equity, each representing a decile of the cross-section of stocks in a given year.
Secondly, we limit our attention to SSD efficient portfolios and we test their efficiency with respect to higher order stochastic dominance. Finally, we compare all results with mean- variance efficiency frontier.
In all our models we assume discrete distribution of monthly returns and no short sales.