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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 (cont’d)

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 portfolio’s 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(Ri)

ATW 7% 3% GAC 7% 4% YTC 15% 15% FTR 3% 3% HTC 8% 12%

ATW dominates GAC ATW dominates FTR