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How performance of risk-based strategies is modified by socially responsible investment universe?

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  • Bertrand, Philippe
  • Lapointe, Vincent

Abstract

Risk-based allocation strategies, also known as Smart Beta allocations, define the weights of assets in portfolios as functions of the individual and common asset risk. In this paper we focus on the Minimum Variance (MV), Maximum Diversification (MD), Equal Risk Contribution (ERC) and Equal-Weight (EW) risk-based allocation strategies. The popularity of risk-based strategy is commonly justified by their good record of out-performing the cap-weighted (CW) allocation strategy. Because of the low-volatility profile of risk-based allocations this is especially true when crises occur. From March 15, 2002 to May 1, 2012 we investigate how using a socially responsible investment universe impacts performance of risk-based allocation strategies. We use different measures of performance, included risk-adjusted one (multi-factor models), and we propose to disentangle the effect of using a SRI universe from the effect of using risk-based allocations. SRI universe only contains firms that have good environmental, social and governance performance. This kind of filtering is increasingly popular among institutional investors. On the estimation period, using European stocks, we find that the use of the SRI universe has a positive contribution to risk-adjusted performance of risk-based allocations. However this contribution is not uniform among all the risk-based allocation strategies and, can represent only a small part of the total alpha that is observed.

Suggested Citation

  • Bertrand, Philippe & Lapointe, Vincent, 2015. "How performance of risk-based strategies is modified by socially responsible investment universe?," International Review of Financial Analysis, Elsevier, vol. 38(C), pages 175-190.
  • Handle: RePEc:eee:finana:v:38:y:2015:i:c:p:175-190
    DOI: 10.1016/j.irfa.2014.11.009
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    3. Raza, Muhammad Wajid & Ashraf, Dawood, 2019. "Does the application of smart beta strategies enhance portfolio performance? The case of Islamic equity investments," International Review of Economics & Finance, Elsevier, vol. 60(C), pages 46-61.
    4. Philippe Bertrand & Vincent Lapointe, 2018. "Risk-based strategies: the social responsibility of investment universes does matter," Annals of Operations Research, Springer, vol. 262(2), pages 413-429, March.
    5. Yue Qi & Xiaolin Li, 2020. "On Imposing ESG Constraints of Portfolio Selection for Sustainable Investment and Comparing the Efficient Frontiers in the Weight Space," SAGE Open, , vol. 10(4), pages 21582440209, December.
    6. Boudt, Kris & Raza, Muhammad Wajid & Wauters, Marjan, 2019. "Evaluating the Shariah-compliance of equity portfolios: The weighting method matters," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 406-417.
    7. Chikashi Tsuji, 2016. "Are Dividend Yield and ROE Smart Portfolio Fundamentals? The Recent Case of Japan," Business and Management Horizons, Macrothink Institute, vol. 4(1), pages 10-21, June.
    8. Singh, Amanjot, 2020. "COVID-19 and safer investment bets," Finance Research Letters, Elsevier, vol. 36(C).
    9. Iván Arribas & María Dolores Espinós-Vañó & Fernando García & Paula Beatriz Morales-Bañuelos, 2019. "The Inclusion of Socially Irresponsible Companies in Sustainable Stock Indices," Sustainability, MDPI, Open Access Journal, vol. 11(7), pages 1-14, April.
    10. Fabio Pizzutilo, 2017. "Measuring the under-diversification of socially responsible investments," Applied Economics Letters, Taylor & Francis Journals, vol. 24(14), pages 1005-1018, August.
    11. Justyna Przychodzen & Fernando Gómez-Bezares & Wojciech Przychodzen & Mikel Larreina, 2016. "ESG Issues among Fund Managers—Factors and Motives," Sustainability, MDPI, Open Access Journal, vol. 8(10), pages 1-19, October.
    12. Francesco Cesarone & Fabio Tardella, 2017. "Equal Risk Bounding is better than Risk Parity for portfolio selection," Journal of Global Optimization, Springer, vol. 68(2), pages 439-461, June.
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    More about this item

    Keywords

    Socially responsible investment; Alternative and smart beta strategies; Risk-adjusted performance; Robust covariance matrix;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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