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Stochastic Dominance over Potential Portfolios: Caution Regarding Covariance

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  • Bruce A. McCarl
  • Thomas O. Knight
  • James R. Wilson
  • James B. Hastie

Abstract

Stochastic dominance historically has been applied to the pair-wise comparison of alternatives. However, difficulties can arise when the alternatives are not mutually exclusive but can be used to form portfolio strategies. In such cases rules can be derived based on normality and the distribution moments. In general, the pure alternatives may be compared as long as the correlation coefficient exceeds the ratio of the standard errors less a potential correction for the difference between the means. The rules inherent in the last statement were empirically verified using normal, uniform, and beta distributions and empirical data. Results indicated that the rules were highly reliable but conservative.

Suggested Citation

  • Bruce A. McCarl & Thomas O. Knight & James R. Wilson & James B. Hastie, 1987. "Stochastic Dominance over Potential Portfolios: Caution Regarding Covariance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 69(4), pages 804-812.
    • Handle: RePEc:oup:ajagec:v:69:y:1987:i:4:p:804-812.
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    File URL: http://hdl.handle.net/10.2307/1242191
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    Citations

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    Cited by:

    1. Pablo C. Benítez & Timo Kuosmanen & Roland Olschewski & G. Cornelis van Kooten, 2006. "Conservation Payments under Risk: A Stochastic Dominance Approach," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(1), pages 1-15.
    2. McCarl, Bruce A., 1988. "Preference Among Risky Prospects Under Constant Risk Aversion," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 20(2), pages 1-10, December.
    3. McCamley, Francis P. & Kliebenstein, James B., 1987. "Identifying The Set Of Ssd-Efficient Mixtures Of Risky Alternatives," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 12(1), pages 1-9, July.
    4. Mikesell, Chris L. & Williams, Jeffery R. & Long, James H., 1987. "Conservation Tillage of Grain Sorghum and Soybeans:A Stochastic Dominance Analysis," Staff Papers 133700, Kansas State University, Department of Agricultural Economics.
    5. Dahl, Bruce L. & Wilson, William W. & Nganje, William E., 2004. "Stochastic Dominance in Wheat Variety Development and Release Strategies," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 29(1), pages 1-18, April.
    6. Ford, Stephen A. & Ford, Beth Pride & Spreen, Thomas H., 1995. "Evaluation of Alternative Risk Specifications in Farm Programming Models," Agricultural and Resource Economics Review, Cambridge University Press, vol. 24(1), pages 25-35, April.
    7. Giesler, G. Grant & Paxton, Kenneth W. & Millhollon, E. P., 1991. "A Gsd Estimation Of The Relative Worth Of Cover Crops In Cotton Production Systems," 1991 Annual Meeting, August 4-7, Manhattan, Kansas 271255, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    8. Elamin H. Elbasha, 2005. "Risk aversion and uncertainty in cost‐effectiveness analysis: the expected‐utility, moment‐generating function approach," Health Economics, John Wiley & Sons, Ltd., vol. 14(5), pages 457-470, May.

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