We derive empirical tests for stochastic dominance that allow for diversification between choice alternatives. The tests can be computed using straightforward linear programming. Bootstrapping techniques and asymptotic distribution theory can approximate the sampling properties of the test results and allow for statistical inference. Our results could provide a stimulus to the further proliferation of stochastic dominance for the problem of portfolio selection and evaluation (as well as other choice problems under uncertainty that involve diversification possibilities). An empirical application for US stock market data illustrates our approach.

linear programming, portfolio diversification, portfolio evaluation, portfolio selection, stochastic dominance
Statistical Decision Theory; Operations Research (jel C44), Corporate Finance and Governance (jel G3), Business Administration and Business Economics; Marketing; Accounting (jel M)
Erasmus Research Institute of Management
ERIM Report Series Research in Management
Copyright 2001, G.T. post, This report in the ERIM Report Series Research in Management is intended as a means to communicate the results of recent research to academic colleagues and other interested parties. All reports are considered as preliminary and subject to possibly major revisions. This applies equally to opinions expressed, theories developed, and data used. Therefore, comments and suggestions are welcome and should be directed to the authors.
Erasmus Research Institute of Management

Post, G.T. (2001). Testing for Stochastic Dominance with Diversification Possibilities (No. ERS-2001-38-F&A). ERIM Report Series Research in Management. Erasmus Research Institute of Management. Retrieved from http://hdl.handle.net/1765/121