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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 |
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| Item Subtype | Original Work |
| Refereed | Yes |
| Status | Published in final form |
| Language |
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| Journal Title | Journal of Quantitative Financial 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 (2005), we derive the reward-risk Capital Asset Pricing Model (CAPM) analogously to the classical mean-variance CAPM. In contrast to the mean-variance model, reward-risk portfolio selection arises from an axiomatic definition of reward and risk measures based on a few basic principles, including consistency with second-order stochastic dominance. With complete markets, we show that at any financial market equilibrium, reward-risk investors’ optimal allocations are comonotonic and, therefore, our model reduces to a representative investor model. Moreover, the pricing kernel is an explicitly given, non-increasing function of the market portfolio return, reflecting the representative investor’s risk attitude. Finally, an empirical application shows that the reward-risk CAPM captures the cross section of U.S. stock returns better than the mean-variance CAPM does. |
| Official URL | https://www.jstor.org/stable/27647359 |
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