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The Cannabis Conundrum: Persistent Negative Alphas and Portfolio Risks

Author

Listed:
  • Davinder K. Malhotra

    (School of Business, Thomas Jefferson University, Philadelphia, PA 19144, USA)

  • Sheetal Gupta

    (Research Scholar, Birla Institute of Management Technology, Greater Noida 201306, UP, India)

Abstract

This study investigates whether publicly listed cannabis shares provide enough risk-adjusted returns to warrant their incorporation into diversified portfolios. An equally weighted portfolio of cannabis companies is constructed using monthly data from January 2015 to December 2024. Risk-adjusted performance is assessed using the Sharpe, Sortino, and Omega ratios and compared to the Russell 3000 Index and the FTSE All-World ex-US Index. In addition, we estimate both unconditional and conditional Fama–French five-factor model enhanced by momentum. The findings indicate that cannabis stocks persistently underperform U.S. and global benchmarks in both absolute and risk-adjusted metrics. Downside risk is elevated because cannabis portfolios exhibit much higher value at risk (VaR) and conditional value at risk (CVaR) than broad indices, especially after COVID-19. The findings show that cannabis stocks are quite volatile and fail to generate significant returns on a risk-adjusted basis. The study highlights the sector’s structural vulnerabilities and cautions investors, portfolio managers, and regulators against treating cannabis shares as dependable long-term investments.

Suggested Citation

  • Davinder K. Malhotra & Sheetal Gupta, 2025. "The Cannabis Conundrum: Persistent Negative Alphas and Portfolio Risks," Risks, MDPI, vol. 13(10), pages 1-19, October.
    • Handle: RePEc:gam:jrisks:v:13:y:2025:i:10:p:193-:d:1764482
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