Mean-variance versus stochastic dominance: Consistency in investment performance indicators for the Chilean mutual funds market

In this paper we analyze the consistency of financial investment ordering based on mean-variance and stochastic dominance (SD) approaches in the context of an emerging financial market. We take 47 Chilean mutual funds and compute Sharpe index and the algorithms to verify first (FSD), second (SSD), and third degree (TSD) stochastic dominance relationships. We find evidence that both approaches generate similar sets of efficient investments. However, there are important dissimilarities between the rankings elaborated according to mean-variance and TSD criteria. TSD criterion presents itself as a complete method for evaluating the risk profile of an investment, as it takes into consideration risk-relevant characteristics of the return probability distribution that are not visible in mean-variance indicators.