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.
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Bibliographic InfoPaper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 10-002.RS.
Length: 36 p.
Date of creation: 2010
Date of revision:
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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," EconomiX Working Papers 2010-3, University of Paris West - Nanterre la Défense, EconomiX.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
- G20 - Financial Economics - - Financial Institutions and Services - - - General
This paper has been announced in the following NEP Reports:
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- 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.
- Bastien Drut, 2009. "Nice but cautious guys: The cost of responsible investing in the bond markets," Working Papers CEB 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, 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, vol. 32(9), pages 1723-1742, September.
- Marie Brière & Ariane Szafarz, 2011. "Investment in Microfinance Equity: Risk, Return, and Diversification Benefits," Working Papers CEB 11-050, ULB -- Universite Libre de Bruxelles.
- Boudt, Kris & Cornelissen, Jonathan & Croux, Christophe, 2012. "The sustainability of mean-variance and mean-tracking error efficient portfolios," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/354104, Katholieke Universiteit Leuven.
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