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Multivariate Tests for Stochastic Dominance Efficiency of a Given Portfolio

Published online by Cambridge University Press:  06 April 2009

Thierry Post
Affiliation:
[email protected], Erasmus University Rotterdam, P.O. Box 1738, Rotterdam, DR 3000, The Netherlands.
Philippe Versijp
Affiliation:
[email protected], Erasmus University Rotterdam, P.O. Box 1738, Rotterdam, DR 3000, The Netherlands.

Abstract

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.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 2007

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