An enhanced model for portfolio choice with SSD criteria: a constructive approach
We formulate a portfolio planning model that is based on second order stochastic dominance as the choice criterion. This model is an enhanced version of the multi objective model proposed by Roman et al. [Math. Progr. Ser. B, 2006, 108, 541 569] the model compares the scaled values of the different objectives, representing tails at different confidence levels of the resulting distribution. The proposed model can be formulated as a risk minimization model where the objective function is a convex risk measure; we characterize this risk measure and the resulting optimization problem. Moreover, our formulation offers a natural generalization of the SSD constrained model of Dentcheva and Ruszczynski [J. Bank. Finance, 2006, 30, 433 451] A cutting plane based solution method for the proposed model is outlined. We present a computational study showing: (a) the effectiveness of the solution methods and (b) the improved modeling capabilities: the resulting portfolios have superior return distributions.