03Lectue_b.ppt

State-by-state Dominance State-by-state Dominance (ctd.) State-by-state Dominance (ctd.) Stochastic Dominance Stochastic dominance can be defined independently of the specific trade-offs (between return, risk and other characteristics of probability distributions) represented by an agents utility function. (“risk-preference-free”) Less “demanding” than state-by-state dominance Stochastic Dominance Still incomplete ordering “More complete” than state-by-state ordering State-by-state dominance ) stochastic dominance Risk preference not needed for ranking! independently of the specific trade-o