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Theory of Social Returns in Portfolio Choice with Application to Microfinance

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  • Gregor Dorfleitner
  • Michaela Leidl
  • Johannes Reeder
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    Abstract

    We complement standard portfolio theory à la Markowitz by adding a social dimension. We distinguish between two main setups, taking social returns as stochastic in the first, but as deterministic in the second. Two main features need to be introduced: Every asset must be assigned a (distribution of) social return(s), and the investor has to cherish social returns. The former comes with measurement problems, whereas the latter is mainly a problem of choice of a suitable utility representation. The focus of this paper is on the theoretical fundamentals and the practical implications of social returns. We apply each version of the theoretical model to a different realm. In the deterministic setup, we look at an investor who faces a small number of assets: the S&P Euro Index, the EuroMTS Global Index, and the responsAbility Global Microfinance, where we assign a social return only to the microfinance investment fund. In the second application with stochastic social returns, we estimate statistical moments of social returns of various microfinance institutions and address the question how microfinance investment funds should allocate funds to microfinance institutions.

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    File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/54397/1/RePEc_sol_wpaper_10-014.pdf
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    Bibliographic Info

    Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 10-014.RS.

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    Length: 29 p.
    Date of creation: 2010
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    Handle: RePEc:sol:wpaper:10-014

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    1. Morduch, J., 1998. "The Microfinance Schism," Papers 626, Harvard - Institute for International Development.
    2. Cull, Robert & Demirguc-Kunt, Asli & Morduch, Jonathan, 2006. "Financial performance and outreach : a global analysis of leading microbanks," Policy Research Working Paper Series 3827, The World Bank.
    3. 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.
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