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Stochastic dominace criteria for investment decision making – empirical evidence from Zagreb Stock Exchange

The paper uses stochastic dominance criteria for evaluating ex-post efficiency of portfolios. Stochastic dominance (SD) is believed to be one of the most flexible methodologies for the comparison and ranking of risky alternatives since it considers all moments of the empirical return distributions of risky alternatives and uses just some general assumptions about the decision makers’ preferences. Criteria use statistics and expected utility theory to identify efficient alternatives that are not stochastically dominated by any other alternatives in terms of expected utility for all decision makers with same preferences. Although computationally intensive, SD is significantly less rigorous in assumptions compared to MV approach. Using the data from the Zagreb Stock Exchange, the paper examines stochastic dominance of portfolios created by implementing an investment strategy based on Data Envelopment. Here stochastic dominance criteria are used for finding efficient portfolios which cannot be ranked by MV criteria for all investors that are insatiable, risk averse and prefer positive skewness.

efficient portfolio; stochastic dominance; investment strategy

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