Article ID: | iaor20171932 |
Volume: | 18 |
Issue: | 2 |
Start Page Number: | 407 |
End Page Number: | 442 |
Publication Date: | Jun 2017 |
Journal: | Optimization and Engineering |
Authors: | Mehra Aparna, Sharma Amita, Agrawal Shubhada |
Keywords: | investment, decision, risk, stochastic processes, simulation |
The less efficient markets offer scope for enhanced indexing (EI), an investment strategy of portfolio selection which seeks to earn more return than the benchmark index. In this context, we examine the use of relaxed second order stochastic dominance (RSSD) by introducing underachievement and overachievement variables in the second order stochastic dominance (SSD), for EI. We propose a linear optimization model that maximizes the mean return subject to the constraints formed using RSSD. We impose bounds on the ratio of the total underachievement to the sum of total underachievement and total overachievement variables depicting the risk‐return tradeoff in the model. The proposed model for EI is inspired from many applications of SSD and almost SSD (ASSD). We examine the performance of the proposed model with the SSD model, EI model of maximizing mean return and minimizing the underperformance (MM) from the benchmark index,