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Type Journal Article
Scope Discipline-based scholarship
Title Second-order stochastic dominance, reward-risk portfolio selection, and the CAPM
Organization Unit
Authors
  • Enrico De Giorgi
  • Thierry Post
Item Subtype Original Work
Refereed Yes
Status Published in final form
Language
  • English
Journal Title Journal of Financial and Quantitative Analysis
Publisher Cambridge University Press
Geographical Reach international
ISSN 0022-1090
Volume 43
Number 2
Page Range 525 - 546
Date 2008
Abstract Text Starting from the reward-risk model for portfolio selection introduced in De Giorgi (2004), we derive the reward-risk Capital Asset Pricing Model (CAPM) analogously to the classical mean-variance CAPM. The reward-risk portfolio selection arises from an axiomatic definition of reward and risk measures based on few basic principles, including consistency with second order stochastic dominance. With complete markets, we show that at any financial market equilibrium, investors’ optimal allocations are comonotonic and therefore the capital market equilibrium model can be reduced to a representative investor model. Moreover, the pricing kernel is an explicitly given, monotone function of the market portfolio return, corresponding to the increments of the distortion function characterizing the epresentative investor’s risk perceptions. Finally, an empirical application shows that the reward-risk CAPM better captures the cross-section of US stock returns than the ean-variance CAPM does.
Official URL http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=32504223&loginpage=Login.asp&site=ehost-live
Digital Object Identifier 10.1017/S0022109000003616
Other Identification Number merlin-id:541
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Additional Information This research has been carried out within the NCCR FINRISK project on “Evolution and Foundations of Financial Markets”. Copyright: Cambridge University Press.