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J. Risk Financial Manag. 2016, 9(4), 11; doi:10.3390/jrfm9040011

Portfolios Dominating Indices: Optimization with Second-Order Stochastic Dominance Constraints vs. Minimum and Mean Variance Portfolios

1
Istanbul University, School of Business, Avcılar 34850, Istanbul, Turkey
2
Glushkov Institute of Cybernetics, Kyiv 03115, Ukraine
3
Department of Industrial and Systems Engineering, University of Florida, Gainesville, FL 32611, USA
*
Author to whom correspondence should be addressed.
Received: 29 February 2016 / Accepted: 27 September 2016 / Published: 4 October 2016
(This article belongs to the Special Issue Advances in Modeling Value at Risk and Expected Shortfall)
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Abstract

The paper compares portfolio optimization with the Second-Order Stochastic Dominance (SSD) constraints with mean-variance and minimum variance portfolio optimization. As a distribution-free decision rule, stochastic dominance takes into account the entire distribution of return rather than some specific characteristic, such as variance. The paper is focused on practical applications of the portfolio optimization and uses the Portfolio Safeguard (PSG) package, which has precoded modules for optimization with SSD constraints, mean-variance and minimum variance portfolio optimization. We have done in-sample and out-of-sample simulations for portfolios of stocks from the Dow Jones, S&P 100 and DAX indices. The considered portfolios’ SSD dominate the Dow Jones, S&P 100 and DAX indices. Simulation demonstrated a superior performance of portfolios with SD constraints, versus mean-variance and minimum variance portfolios. View Full-Text
Keywords: stochastic dominance; stochastic order; portfolio optimization; portfolio selection; Dow Jones Index; S&P 100 Index; DAX index; partial moment; conditional value-at-risk; CVaR stochastic dominance; stochastic order; portfolio optimization; portfolio selection; Dow Jones Index; S&P 100 Index; DAX index; partial moment; conditional value-at-risk; CVaR
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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Fidan Keçeci, N.; Kuzmenko, V.; Uryasev, S. Portfolios Dominating Indices: Optimization with Second-Order Stochastic Dominance Constraints vs. Minimum and Mean Variance Portfolios. J. Risk Financial Manag. 2016, 9, 11.

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