Multivariate Test for Stochastic Dominance efficiency of a Given Portfolio
June 2007
Article
volume 42, issue 2 pp 489-515.
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We develop empirical tests for stochastic dominance efficiency of a given investment portfolio relative to all possible portfolios formed from a given set of assets. Our tests use multivariate statistics, which result in superior statistical power properties compared to existing stochastic dominance efficiency tests and increase the comparability with existing mean-variance efficiency tests. Using our tests, we demonstrate that the mean-variance inefficiency of the CRSP all-share index relative to beta-sorted portfolios can be explained by tail risk not captured by variance.
Keywords
- investment analysis
- risk assessment
- investments
- diversification in industry
- efficient market theory
- multivariate analysis
- stochastic analysis
