Lecture17-2004 - Lecture XVII Development of FSD and SSD I...

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1 Lecture XVII Development of FSD and SSD I. The Concept of an Efficiency Criteria A. An efficiency criteria is a decision rule for dividing alternatives into two mutually exclusive groups: efficient and inefficient. 1. If an alternative is in the efficient group, then it is one that an investor may choose. 2. An inefficient investment will not be chosen by any investor regardless of individual risk preferences. B. From an economic standpoint, the criteria should be related to general notions of utility or preferences. 1. In general, the more global the preference, the less discerning the criteria (i.e. the fewer alternatives eliminated). 2. A smaller efficient set requires more stringent requirements on preferences. II. First Degree Stochastic Dominance A. The most general efficiency criteria relies only on the assumption that utility is nondecreasing in income, or the decision maker prefers more of at least one good to less. B. FSD Rule: Given two cumulative distribution functions F and G , an option F will be preferred to the second option G by FSD independent of concavity if () () Fx Gx for all return x with at least one strict inequality.
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This note was uploaded on 07/15/2011 for the course AEB 6182 taught by Professor Weldon during the Fall '08 term at University of Florida.

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Lecture17-2004 - Lecture XVII Development of FSD and SSD I...

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