Making inefficient market indices efficient

Making inefficient market indices efficient

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Article ID: iaor20108337
Volume: 209
Issue: 1
Start Page Number: 83
End Page Number: 93
Publication Date: Feb 2011
Journal: European Journal of Operational Research
Authors: , ,
Keywords: programming: integer, measurement
Abstract:

This paper uses the concept of Marginal Conditional Stochastic Dominance and a generalization of the 50% Portfolio Rule to develop a tractable and parsimonious methodology for constructing a second degree Stochastic Dominance (SSD) efficient portfolio from a given, inefficient index. Because the SSD approach considers the entire probability distributions of asset returns, the resulting portfolios are efficient with respect to all risk-averse, utility-maximizing investors regardless of the form of their utility functions or the distributions of asset returns.

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