R. Burr Porter, Roger P. Bey, David C. Lewis, The Development of a Mean-Semivariance Approach to Capital Budgeting, The Journal of Financial and Quantitative Analysis, Vol. 10, No. 4, 1975 Proceedings (Nov., 1975), pp. 639-649

Recent theoretical and empirical work in portfolio theory has exhibited a natural evolution from the two-moment EV model popularized by Markowitz through the higher moment models to selection on the basis of the entire probability function. This latter approach, referred to as the Stochastic Dominance (SD) approach to portfolio selection, has been shown to be theoretically superior to all of the “moment methods” and has been the focus of an increasing volume of empirical work.

Previous empirical studies of mutual fund performance relative to market performance were conducted using two- and three-moment analysis. This study has applied first-, second-, and third-degree stochastic dominance principles to investigate the same question. Our results support the earlier Sharpe study and oppose the recent Arditti work. From the investor's standpoint, mutual fund performance was inferior to market performance over the period 1954–1963.