Relevance of the Stochastic Dominance in selecting Optimal Portfolio in the Nigerian Oil and Gas Industry

Abstract

The study examined the relevance of the stochastic dominance in selecting optimal portfolio of eight (8) listed companies in the Nigerian oil and gas industry for the period 2012 to 2021. The Vose Model Risk Software was used to analyze the stochastic dominance of the portfolio assets of the sectors. From the stochastic dominance result obtained, it was observed that, Japaul Gold & Ventures Plc is first order stochastic dominance over all other companies in the oil and gas industry. By implication, the portfolio of Japaul Gold & Ventures Plc significantly dominates Ardova Plc, Conoil Plc, Oando Plc, Total Nigeria Plc, Seplat Petroleum Development Company Plc, 11 Plc, and MRS Oil Nigeria Plc in terms of investment options (choices), informed by the returns. Hence, the study concludes that, investors can only achieve optimal portfolio, only if they invest in the stocks of Japaul Gold & Ventures Plc and Ardova Plc, Conoil Plc and pairing them with stocks from less dominant companies in the oil and gas industry. The study therefore recommends that, in order to effectively optimize returns on portfolio in the market, investors must assign more weight/funds (asset allocation) to Japaul Gold & Ventures Plc stocks followed by the Ardova Plc, Conoil Plc, Oando Plc, Total Nigeria Plc, Seplat Petroleum Development Company Plc, 11 Plc, and MRS Oil Nigeria Plc stocks respectively.

Keywords: Stochastic Dominance, Optimal Portfolio Selection, First Order, Second Order, Investors’ Preference