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Tri-criterion inverse portfolio optimization with application to socially responsible mutual funds

Author

Listed:
  • Utz, Sebastian
  • Wimmer, Maximilian
  • Hirschberger, Markus
  • Steuer, Ralph E.

Abstract

We present a framework for inverse optimization in a Markowitz portfolio model that is extended to include a third criterion. The third criterion causes the traditional nondominated frontier to become a surface. Until recently, it had not been possible to compute such a surface. But by using a new method that is able to generate the nondominated surfaces of tri-criterion portfolio selection problems, we are able to compute via inverse optimization the implied risk tolerances of given funds that pursue an additional objective beyond risk and return. In applying this capability to a broad sample of conventional and socially responsible (SR) mutual funds, we find that there appears to be no significant evidence that social responsibility issues, after the screening stage, are further taken into account in the asset allocation process, which is a result that is likely to be different from what many SR investors would expect.

Suggested Citation

  • Utz, Sebastian & Wimmer, Maximilian & Hirschberger, Markus & Steuer, Ralph E., 2014. "Tri-criterion inverse portfolio optimization with application to socially responsible mutual funds," European Journal of Operational Research, Elsevier, vol. 234(2), pages 491-498.
  • Handle: RePEc:eee:ejores:v:234:y:2014:i:2:p:491-498
    DOI: 10.1016/j.ejor.2013.07.024
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:quaeco:v:65:y:2017:i:c:p:1-15 is not listed on IDEAS
    2. Utz, Sebastian & Wimmer, Maximilian & Steuer, Ralph E., 2015. "Tri-criterion modeling for constructing more-sustainable mutual funds," European Journal of Operational Research, Elsevier, vol. 246(1), pages 331-338.
    3. Petrillo, Antonella & De Felice, Fabio & García-Melón, Mónica & Pérez-Gladish, Blanca, 2016. "Investing in socially responsible mutual funds: Proposal of non-financial ranking in Italian market," Research in International Business and Finance, Elsevier, vol. 37(C), pages 541-555.
    4. repec:spr:annopr:v:244:y:2016:i:2:d:10.1007_s10479-016-2132-5 is not listed on IDEAS
    5. repec:pal:assmgt:v:18:y:2017:i:2:d:10.1057_s41260-016-0011-x is not listed on IDEAS
    6. Cabello, J.M. & Ruiz, F. & Pérez-Gladish, B. & Méndez-Rodríguez, P., 2014. "Synthetic indicators of mutual funds’ environmental responsibility: An application of the Reference Point Method," European Journal of Operational Research, Elsevier, vol. 236(1), pages 313-325.
    7. García-Bernabeu, A. & Pla-Santamaria, D. & Bravo, M. & Pérez-Gladish, B., 2015. "La protección medioambiental como criterio en la selección de inversiones socialmente responsables: una aproximación multicriterio," Economia Agraria y Recursos Naturales, Spanish Association of Agricultural Economists, vol. 15(1).
    8. repec:spr:annopr:v:251:y:2017:i:1:d:10.1007_s10479-015-1900-y is not listed on IDEAS
    9. Bekiros, Stelios & Hernandez, Jose Arreola & Hammoudeh, Shawkat & Nguyen, Duc Khuong, 2015. "Multivariate dependence risk and portfolio optimization: An application to mining stock portfolios," Resources Policy, Elsevier, vol. 46(P2), pages 1-11.
    10. repec:eee:finana:v:52:y:2017:i:c:p:213-227 is not listed on IDEAS
    11. Jano-Ito, Marco A. & Crawford-Brown, Douglas, 2017. "Investment decisions considering economic, environmental and social factors: An actors' perspective for the electricity sector of Mexico," Energy, Elsevier, vol. 121(C), pages 92-106.
    12. repec:gam:jsusta:v:8:y:2016:i:5:p:485:d:70240 is not listed on IDEAS
    13. Nomeda Dobrovolskienė & Rima Tamošiūnienė, 2016. "Sustainability-Oriented Financial Resource Allocation in a Project Portfolio through Multi-Criteria Decision-Making," Sustainability, MDPI, Open Access Journal, vol. 8(5), pages 1-18, May.
    14. Calvo, Clara & Ivorra, Carlos & Liern, Vicente, 2015. "Finding socially responsible portfolios close to conventional ones," International Review of Financial Analysis, Elsevier, vol. 40(C), pages 52-63.
    15. Gasser, Stephan M. & Rammerstorfer, Margarethe & Weinmayer, Karl, 2017. "Markowitz revisited: Social portfolio engineering," European Journal of Operational Research, Elsevier, vol. 258(3), pages 1181-1190.
    16. Muñoz, Fernando, 2016. "Cash flow timing skills of socially responsible mutual fund investors," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 110-124.
    17. repec:eee:ejores:v:269:y:2018:i:1:p:111-131 is not listed on IDEAS

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