First Stochastic Dominance and Risk Measurement

Niu, Cuizhen and Wong, Wing-Keung and Zhu, Lixing (2016): First Stochastic Dominance and Risk Measurement.

Abstract

Farinelli and Tibiletti (2008) propose a general risk-reward performance measurement ratio. Due to its simplicity and generality, the F-T ratios have gained much attentions. F-T ratios are ratios of average gains to average losses with respect to a target, each raised by some power index. Omega ratio and Upside Potential ratio are both special cases of F-T ratios. In this paper, we establish the consistency of F-T ratios with respect to first-order stochastic dominance. It is shown that second-order stochastic dominance is not consistent to the F-T ratios. This point is illustrated by a simple example.

• Item Type: MPRA Paper
• Language: English
• Keywords: Stochastic Dominance, Upside Potential Ratio, Farinelli and Tibiletti ratio.
• Subjects: C - Mathematical and Quantitative Methods > C0 - General > C00 - General; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; G - Financial Economics > G1 - General Financial Markets > G10 - General

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