Portfolio Dominance describes a state where one investment portfolio consistently outperforms another across various risk-return metrics. This typically implies a superior risk-adjusted return for the dominant portfolio. This concept is fundamental in portfolio optimization and investment evaluation.
Mechanism
Portfolio dominance is established by comparing the expected returns and standard deviations, or other pertinent risk measures, of different portfolios. A portfolio ‘A’ dominates portfolio ‘B’ if ‘A’ offers a higher expected return for the same level of risk, or an equivalent expected return for a lower level of risk, under comparable market conditions.
Methodology
Evaluation of portfolio dominance often employs quantitative techniques like mean-variance analysis, stochastic dominance, or various performance ratios such as Sharpe or Sortino ratios. This methodology provides a structured framework for selecting optimal portfolios that align with specific investor risk tolerances and return objectives within the volatile digital asset investment landscape.
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