STOCHASTIC DOMINANCE AND MEAN VARIANCE RULES IN THE SELECTION OF RISKY INVESTMENTS

This paper reexamines the methods of stochastic dominance and mean-variance analysis for the selection of risky investments. It takes as its starting point the paper by Gandhi and Saunders in the Spring 1981 issue of this journal in which they argued for the superiority of stochastic dominance analysis. In this paper the countercase is put forward for the use of mean-variance analysis. It is argued that while naive application of mean-variance criteria to the ranking of projects in isolation might lead to erroneous decisions, in the presence of reasonably sized capital markets rules based on mean-variance analysis still remain a more practical tool.