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.

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Erasmus Research Institute of Management
ERIM Report Series Research in Management
Erasmus Research Institute of Management

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