Abstract

Mean-variance (MV) optimization is one of the most impactful frameworks in the world of financial markets; however, mean-variance analysis adopts relatively strict assumptions including, but not limited to, investor preferences and normal probability distribution. Because of these strong assumptions, the effectiveness of MV optimization becomes a major concern, especially in various market conditions. Stochastic dominance (SD), utilized in numerous fields, develops a preference-ranking strategy that attempts to relax the limitations of mean-variance analysis. The central question of this research is to determine whether stochastic dominance techniques outperform their mean-variance counterparts over the course of the 2008 Global Financial Crisis. This question is empirically tested by applying the MV and second-order SD criteria to the College of Wooster’s Jenny Investment Club portfolio. Further contemplation of the prevailing strategy’s performance on a quarterly basis, relative to macroeconomic factors that affect equity markets, is considered. Due to the lack of a proper weighting strategy, stochastic dominance techniques appear to be better suited as a complement to mean-variance strategies, rather than as a replacement.

Advisor

Tian, Huiting

Department

Business Economics

Disciplines

Portfolio and Security Analysis

Keywords

Portfolio Theory, Stochastic Dominance, 2008 GFC

Publication Date

2020

Degree Granted

Bachelor of Arts

Document Type

Senior Independent Study Thesis

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