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The Notion of Dominance

The document discusses the concept of dominance in portfolio theory. It defines dominance as a situation where one alternative is universally preferred over another due to having either higher expected returns at the same level of risk, or lower risk at the same level of expected returns. A dominant portfolio provides either the highest return for its level of risk or the lowest risk for its level of expected return compared to other portfolios. The document also discusses how efficient portfolios provide the optimal balance of risk and return and cannot be improved by including or substituting other assets.

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Harshit Singh
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403 views8 pages

The Notion of Dominance

The document discusses the concept of dominance in portfolio theory. It defines dominance as a situation where one alternative is universally preferred over another due to having either higher expected returns at the same level of risk, or lower risk at the same level of expected returns. A dominant portfolio provides either the highest return for its level of risk or the lowest risk for its level of expected return compared to other portfolios. The document also discusses how efficient portfolios provide the optimal balance of risk and return and cannot be improved by including or substituting other assets.

Uploaded by

Harshit Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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The Notion of

Dominance

Concept of Dominance
Dominance is a situation in which investors
universally prefer one alternative over another
All rational investors will clearly prefer one
alternative

Concept of Dominance (contd)


A portfolio dominates all others if:
For its level of expected return, there is no
other portfolio with less risk
For its level of risk, there is no other portfolio
with a higher expected return

Dominant and efficient portfolio


Dominance refers to the superiority of one
portfolio over the other
A set can dominate over the other,if with the same
return ,the risk is lower or with the same risk,the
return is higher
Dominance principle involves the trade off
between risk and return

The concept of dominance tells that no investor


should invest in one co alone and if there are two
or more cos with the same risk ,then he has to
choose the one with higher returns and if both
have the sane return he has to choose the one
with lower risk

A portfolio is efficient when it is expected to yield


the highest return for the level of risk accepted or,
alternatively ,the smallest possible risk for a
specified level of expected return
To build an efficient portfolio an expected return
level is chosen ,and assets are substituted until the
portfolio combination with the small variance at the
return level is found
As this process is repeated for other expected
returns, a set of efficient portfolios is generated.
A single asset or portfolio is efficient if no other
asset or portfolio offers higher expected return with
the same or lower risk or lower risk with the same
expected return

Dominance Principle
Example
Security
E(R )

ATW
GAC
YTC
FTR
HTC

7%
7%
15%
3%
8%

3%
4%
15%
3%
12%

ATW dominates GAC


ATW dominates FTR

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