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Efficiency Analysis and Option Portfolio Selection

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  • Booth, James R.
  • Tehranian, Hassan
  • Trennepohl, Gary L.

Abstract

The unique characteristics of options enable investors to create nonnormal portfolio return distributions that cannot be replicated with other assets. This analysis explores the power of various investment selection criteria to identify efficient portfolios from investment strategies involving call options and treasury bills, stocks, and covered option writing. The preference structure for strategies incorporating options is compared to traditional stock-fixed income investments, and the importance of options to investor utility maximization is illustrated. This study reveals that rules of stochastic dominance that place few restrictions on investor preference functions and asset return distribution are appropriate criteria by which to rank portfolios containing options and other assets.

Suggested Citation

  • Booth, James R. & Tehranian, Hassan & Trennepohl, Gary L., 1985. "Efficiency Analysis and Option Portfolio Selection," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(4), pages 435-450, December.
    • Handle: RePEc:cup:jfinqa:v:20:y:1985:i:04:p:435-450_01
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    Citations

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    Cited by:

    1. J. Board & C. Sutcliffe & E. Patrinos, 2000. "The performance of covered calls," The European Journal of Finance, Taylor & Francis Journals, vol. 6(1), pages 1-17.
    2. Lam, Kin & Lean, Hooi Hooi & Wong, Wing-Keung, 2016. "Stochastic Dominance and Investors’ Behavior towards Risk: The Hong Kong Stocks and Futures Markets," MPRA Paper 74386, University Library of Munich, Germany.
    3. Scheuenstuhl, Gerhard & Zagst, Rudi, 2008. "Integrated portfolio management with options," European Journal of Operational Research, Elsevier, vol. 185(3), pages 1477-1500, March.
    4. Bhargava, Vivek & Brooks, Robert, 2002. "Exploration of the role of expectations in foreign exchange risk management," Journal of Multinational Financial Management, Elsevier, vol. 12(2), pages 171-189, April.
    5. Man-Chung Ng, 2000. "A Remark on Third Degree Stochastic Dominance," Management Science, INFORMS, vol. 46(6), pages 870-873, June.
    6. Margareta Gardijan Kedžo & Boško Šego, 2021. "The relative efficiency of option hedging strategies using the third-order stochastic dominance," Computational Management Science, Springer, vol. 18(4), pages 477-504, October.
    7. Gary L. Trennepohl & James R. Booth & Hassan Tehranian, 1988. "An Empirical Analysis Of Insured Portfolio Strategies Using Listed Options," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 11(1), pages 1-12, March.
    8. J. Annaert & S. Van Osselaer & B. Verstraete, 2007. "Performance evaluation of portfolio insurance strategies using stochastic dominance criteria," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 07/473, Ghent University, Faculty of Economics and Business Administration.
    9. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

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