A shadow utility of portfolios efficient with respect to the second order stochastic dominance

Abstract

We consider diversification-consistent DEA models which are consistent with the second order stochastic dominance (SSD). These models can identify the portfolios which are SSD efficient and suggest the revision of portfolio weights for the inefficient ones.

There is also a way how to reconstruct the utility of particular investors based on efficient portfolio which they hold. We apply the above mentioned approaches to industry representative portfolios and discuss the risk aversion of the investors.

We focus on the sensitivity with respect to various levels of the risk aversion.

Keywords

• Data envelopment analysis
• diversification
• second order stochastic dominance
• risk aversion
• shadow utility
• sensitivity