Portfolio Optimization with Stochastic Dominance Constraints

Darinka Dentcheva (ddentchestevens.edu)
Andrzej Ruszczynski (ruszrutcor.rutgers.edu)

Abstract: We consider the problem of constructing a portfolio of finitely many assets whose returns are described by a discrete joint distribution. We propose a new portfolio optimization model involving stochastic dominance constraints on the portfolio return. We develop optimality and duality theory for these models. We construct equivalent optimization models with utility functions. Numerical illustration is provided.

Keywords: Portfolio optimization, stochastic dominance, risk, utility functions

Category 1: Stochastic Programming

Category 2: Applications -- OR and Management Sciences (Finance and Economics )

Category 3: Convex and Nonsmooth Optimization (Convex Optimization )

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Entry Submitted: 02/03/2004
Entry Accepted: 02/04/2004
Entry Last Modified: 02/25/2007

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