Theory of social returns in portfolio choice with application to microfinance

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. 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. JEL-classification: G11, G21, G32, D64, D81

Safety first portfolio choice based on financial and sustainability returns

“…Dupré et al (2004) discuss the extension of the Markowitz portfolio model about a quantity measuring sustainability. While all of the references cited above shape the sustainability quantity as deterministic, Dorfleitner et al (2010) introduce the idea of stochastic social returns and incorporate them into the classical portfolio selection. The notion of µ-σ efficiency is generalized to a concept comprising the expected values and standard deviations of the financial and the sustainability returns as well as their covariance.…”

“…Even if this is not the standard view in SRI, we feel that it is the most realistic assumption since ex ante one never can say to what extent the good intentions the management of a company has will become reality. Dupré et al (2004) and Dorfleitner et al (2010) use variances and covariances as a measure of risk. Several studies of portfolio theory suggest other risk measures than standard deviation.…”

“…In contrast to Dorfleitner et al (2010), who extend the classical Markowitz framework, we generalize the theory of safety first investors. The basic idea is that an investment is characterized by different quantities, namely the initial wealth V 0 in t = 0 and the final wealth V t and a value of sustainability at the end of the investment period [0, t].…”

Sustainability-Oriented Financial Resource Allocation in a Project Portfolio through Multi-Criteria Decision-Making

“…However, most recently, the additional criterion that seems to be receiving the most consideration is social responsibility [42,57]. Over the past few years numerous papers on social responsibility in portfolio selection have been published [51,52,54,[58][59][60][61][62][63][64][65][66][67][68][69]. One of the most recent works on this subject comes from Utz et al [52] who extended the Markowitz model by complementing it with a social responsibility objective, in addition to the portfolio return and variance, thereby making the traditional efficient frontier a surface.…”

Ethically Constrained Portfolio Selection of Funds by CP Modelling: A Real World Environmental Case

“…Portfolio Selection models including social and/or environmental criteria are rather in scarce (see Ballestero et al 2012;Gupta et al 2013;Barrachini 2004;Bilbao-Terol et al 2012Hallerbach et al 2004;Hirschberger et al 2012;Steuer et al 2007;Dorfleitner et al 2012) and in most of the cases social and/or environmental performance measurement relies on a crisp or precise real number reflecting the number of applied screens.…”