Social responsibility and mean-variance portfolio selection
AbstractIn theory, investors choosing to invest only in socially responsible entities restrict their investment universe and should thus be penalized in a mean-variance framework. When computed, this penalty is usually viewed as valid for all socially responsible investors. This paper shows however that the additional cost for responsible investing depends essentially on the investors’ risk aversion. Social ratings are introduced in mean-variance optimization through linear constraints to explore the implications of considering a social responsibility (SR) threshold in the traditional Markowitz (1952) portfolio selection setting. We consider optimal portfolios both with and without a risk-free asset. The SR-efficient frontier may take four different forms depending on the level of the SR threshold: a) identical to the non-SR frontier (i.e. no cost), b) only the left portion is penalized (i.e. a cost for high-risk-aversion investors only), c) only the right portion is penalized (i.e. a cost for low-risk aversion investors only) and d) the whole frontier is penalized (i.e. a positive cost for all the investors). By precisely delineating under which circumstances SRI is costly, those results help elucidate the apparent contradiction found in the literature about whether or not SRI harms diversification.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2010-3.
Length: 35 pages
Date of creation: 2010
Date of revision:
Socially Responsible Investment; Portfolio Selection; Mean-variance Optimization; Linear Constraint; Socially Responsible Ratings;
Other versions of this item:
- Bastien Drut, 2010. "Social responsibility and mean-variance portfolio selection," Working Papers CEB, ULB -- Universite Libre de Bruxelles 10-002.RS, ULB -- Universite Libre de Bruxelles.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G20 - Financial Economics - - Financial Institutions and Services - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-28 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- DeRoon, Frans A. & Nijman, Theo E., 2001.
"Testing for mean-variance spanning: a survey,"
Journal of Empirical Finance, Elsevier,
Elsevier, vol. 8(2), pages 111-155, May.
- Nijman, T.E. & Roon, F.A. de, 2001. "Testing for mean-variance spanning: A survey," Open Access publications from Tilburg University urn:nbn:nl:ui:12-87531, Tilburg University.
- Roon, F.A. de & Nijman, T.E., 1998. "Testing for mean-variance spanning: A survey," Discussion Paper, Tilburg University, Center for Economic Research 1998-132, Tilburg University, Center for Economic Research.
- Bastien Drut, 2009. "Nice but cautious guys: The cost of responsible investing in the bond markets," Working Papers CEB, ULB -- Universite Libre de Bruxelles 09-034.RS, ULB -- Universite Libre de Bruxelles.
- Best, Michael J. & Grauer, Robert R., 1990. "The efficient set mathematics when mean-variance problems are subject to general linear constraints," Journal of Economics and Business, Elsevier, Elsevier, vol. 42(2), pages 105-120, May.
- Renneboog, Luc & Ter Horst, Jenke & Zhang, Chendi, 2008. "Socially responsible investments: Institutional aspects, performance, and investor behavior," Journal of Banking & Finance, Elsevier, Elsevier, vol. 32(9), pages 1723-1742, September.
- Amelia Bilbao-Terol & Mar Arenas-Parra & Verónica Cañal-Fernández & Celia Bilbao-Terol, 2013. "Selection of Socially Responsible Portfolios Using Hedonic Prices," Journal of Business Ethics, Springer, Springer, vol. 115(3), pages 515-529, July.
- Marie Briere & Ariane Szafarz, 2011.
"Investment in Microfinance Equity: Risk, Return, and Diversification Benefits,"
Working Papers CEB, ULB -- Universite Libre de Bruxelles
11-050, ULB -- Universite Libre de Bruxelles.
- Szafarz, Ariane & Brière, Marie, 2011. "Investment in Microfinance Equity : Risk, Return, and Diversification Benefits," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/7858, Paris Dauphine University.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Valérie Mignon).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.