Markowitz Revisited Social Portfolio Engineering

European Journal of Operational Research (EJOR)

Posted: 18 Aug 2014 Last revised: 29 Oct 2016

See all articles by Stephan Gasser

Stephan Gasser

Vienna University of Economics and Business - Institute for Finance, Banking and Insurance

Margarethe Rammerstorfer

Vienna University of Economics and Business - Department of Corporate Finance

Karl Weinmayer

Modul University Vienna - Department of International Management; Vienna University of Economics and Business - Institute for Finance, Banking and Insurance

Date Written: November 2016

Abstract

In recent years socially responsible investing has become an increasingly more popular subject with both private and institutional investors. At the same time, a number of scientific papers have been published on socially responsible investments (SRIs), covering a broad range of topics, from what actually defines SRIs to the financial performance of SRI funds in contrast to non-SRI funds. In this paper, we revisit Markowitz’ Portfolio Selection Theory and propose a modification allowing to incorporate not only asset-specific return and risk expectations but also a social responsibility measure into the investment decision making process. Together with a risk-free asset, this results in a three-dimensional capital allocation plane that allows investors to custom-tailor their asset-allocations and incorporate all personal preferences regarding risk, return and social responsibility. We apply the model on a set of over 9000 international stocks and find that investors opting to maximize the social impact of their investments do indeed face a statistically significant decrease in expected returns. However, the social responsibility/risk-optimal portfolio yields a statistically significant higher social responsibility rating than the return/risk-optimal portfolio.

Keywords: Socially Responsible Investments, Portfolio Optimization, International Financial Markets

JEL Classification: G11, G15, A13

Suggested Citation

Gasser, Stephan and Rammerstorfer, Margarethe and Weinmayer, Karl, Markowitz Revisited Social Portfolio Engineering (November 2016). European Journal of Operational Research (EJOR). Available at SSRN: https://ssrn.com/abstract=2481987 or http://dx.doi.org/10.2139/ssrn.2481987

Stephan Gasser (Contact Author)

Vienna University of Economics and Business - Institute for Finance, Banking and Insurance ( email )

Welthandelsplatz 1
Building D4
Vienna, 1020
Austria
+43 1 31336 6245 (Phone)

HOME PAGE: http://https://www.wu.ac.at/finance/people/faculty/gasser/

Margarethe Rammerstorfer

Vienna University of Economics and Business - Department of Corporate Finance ( email )

Welthandelsplatz 1
1020 Vienna
Austria

Karl Weinmayer

Modul University Vienna - Department of International Management ( email )

Am Kahlenberg 1
Vienna, 1190
Austria
+43-1-3203555-653 (Phone)

Vienna University of Economics and Business - Institute for Finance, Banking and Insurance ( email )

Welthandelsplatz 1
Building D4, 4th floor
Vienna, 1020
Austria

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