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.

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ERIM Top-Core Articles
Journal of Financial and Quantitative Analysis
Erasmus Research Institute of Management

Post, T., & Versijp, P. (2007). Multivariate Test for Stochastic Dominance efficiency of a Given Portfolio. Journal of Financial and Quantitative Analysis, 42(2), 489–515. Retrieved from http://hdl.handle.net/1765/14064