Stochastic Programming with Multivariate Second Order Stochastic Dominance Constraints with Applications in Portfolio Optimization

Meskarian, Rudabeh; Fliege, Jörg; Xu, Huifu
August 2014
Applied Mathematics & Optimization;Aug2014, Vol. 70 Issue 1, p111
Academic Journal
In this paper we study optimization problems with multivariate stochastic dominance constraints where the underlying functions are not necessarily linear. These problems are important in multicriterion decision making, since each component of vectors can be interpreted as the uncertain outcome of a given criterion. We propose a penalization scheme for the multivariate second order stochastic dominance constraints. We solve the penalized problem by the level function methods, and a modified cutting plane method and compare them to the cutting surface method proposed in the literature. The proposed numerical schemes are applied to a generic budget allocation problem and a real world portfolio optimization problem.


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