An individual is faced with several options while deciding to invest in a financial market. Some opportunities giving higher returns but carrying more risk while some being less risky and give lower returns. Each individual needs to rank the investment opportunities according to his preference. Stochastic Dominance (SD) is a method for ranking the random variables. In particular, second-order stochastic dominance (SSD) is related to the risk-averse investor preferences. In this talk, I will introduce the concept of SD. We will also look into an application of SSD (for a risk-averse investor) to construct a portfolio that generates higher returns as compared to the reference index.
