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Contribution Details
| Type | Conference Presentation |
| Scope | Discipline-based scholarship |
| Title | Second Order Stochastic Dominance, Reward-Risk Portfolio Selection and the CAPM |
| Organization Unit | |
| Authors |
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| Presentation Type | paper |
| Item Subtype | Original Work |
| Refereed | Yes |
| Status | Published in final form |
| Language |
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| Page Range | 1 - 27 |
| Event Title | 14th European Workshop on General Equilibrium Theory |
| Event Type | workshop |
| Event Location | Zürich, Switzerland |
| Event Start Date | May 21 - 2005 |
| Event End Date | May 21 - 2005 |
| Abstract Text | Starting from the reward-risk model for portfolio selection introduced in DeGiorgi (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 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 better captures the cross-section of US stock returns than the mean-variance CAPM does. |
| Official URL | http://papers.ssrn.com/sol3/papers.cfm?abstract_id=643481 |
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| Additional Information | also presented at: International Conference on Risk Management and Quantitative Methods in Finance, University of Florida, Gainesville, USA, April 6-8, 2005 |