Comparing mean variance tests with stochastic dominance tests when assessing international portfolio diversification benefits

Stochastic dominance is theoretically superior to mean-variance (MV) analysis because it considers the entire return distribution and is based on minimally restrictive assumptions regarding investor motives. This study uses stochastic dominance to examine whether adding internationally based assets to a wholly domestic portfolio generates diversification benefits for an investor. In contrast to previous MV findings, a New Zealand-only portfolio stochastically dominates four internationally diversified portfolios across all periods considered. Similarly, the least internationally diversified portfolio persistently dominates more diversified counterparts. Within-portfolio analysis shows that in the Asian Crisis period, the least risky or lowest return weighting schemes dominate those with greater risk and/or higher return characteristics. © 2005 Academy of Financial Services. All rights reserved. JEL classification: F36; G11; G15