Frontiers of Stochastically Nondominated Portfolios

Andrzej Ruszczynski, Robert J. Vanderbei

Econometrica · 2003 · Volume 71 · Issue 4

Abstract

We consider the problem of constructing a portfolio of finitely many assets whose returns are described by a discrete joint distribution.We propose mean-risk models that are solvable by linear programming and generate portfolios whose returns are nondominated in the sense of second-order stochastic dominance. Next, we develop a specialized parametric method for recovering the entire mean-risk efficient frontiers of these models and we illustrate its operation on a large data set involving thousands of assets and realizations.

Keywords

Portfolio optimization, stochastic dominance, mean-risk analysis, least absolute deviations, linear programming, parametric simplex method, robust statistics

Enable JavaScript for citation tools and additional paper interactions.