Making inefficient market indices efficient.

Clark, Ephraim A., Jokung, Octave and Kassimitis, Konstantinos (2011) Making inefficient market indices efficient. European Journal of Operational Research, 209 (1) . pp. 83-93. ISSN 0377-2217 [Article] (doi:10.1016/j.ejor.2010.09.013)

Abstract

This paper uses the concept of Marginal Conditional Stochastic Dominance and a generalization of the 50% Portfolio Rule to develop a tractable and parsimonious methodology for constructing a second degree Stochastic Dominance (SSD) efficient portfolio from a given, inefficient index. Because the SSD approach considers the entire probability distributions of asset returns, the resulting portfolios are efficient with respect to all risk-averse, utility-maximizing investors regardless of the form of their utility functions or the distributions of asset returns.

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