Comparing mean variance tests with stochastic dominance tests when assessing international portfolio diversification benefits

Authors

  • Thomas O. Meyer Department of Marketing and Finance, Southeastern Louisiana University
  • Xiao-Ming Li Department of Commerce, Massey University, Albany Campus, Auckland
  • Lawrence C. Rose Department of Commerce, Massey University, Albany Campus, Auckland

DOI:

https://doi.org/10.61190/fsr.v14i2.4822

Keywords:

Portfolio optimization, Asian crisis, International diversification, Stochastic dominance

Abstract

Stochastic dominance is theoretically superior to mean-variance (MY) analysis because it considers the entire return distribution and is based on minimally restrictive assumptions regarding investor motives. This study uses stochastic dominance to examine whether adding internationally based assets to a wholly domestic portfolio generates diversification benefits for an investor. In contrast to previous MY findings, a New Zealand-only portfolio stochastically dominates four internationally diversified portfolios across all periods considered. Similarly, the least internationally diversified portfolio persistently dominates more diversified counterparts. Within-portfolio analysis shows that in the Asian Crisis period, the least risky or lowest return weighting schemes dominate those with greater risk and/or higher return characteristics.

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Published

2005-06-30

Issue

Vol. 14 No. 2 (2005): FSR Summer 2005

Section

New Original Submission

License

Copyright (c) 2005 Academy of Financial Services

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How to Cite

Comparing mean variance tests with stochastic dominance tests when assessing international portfolio diversification benefits. (2005). Financial Services Review, 14(2), 149-168. https://doi.org/10.61190/fsr.v14i2.4822