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

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 after the screening process there appears to be no significant difference between how assets are allocated in socially responsible and conventional mutual funds, which is likely to be different from what most SR investors would expect.

Corporate social responsibility in portfolio selection: A “goal games” against nature approach

“…Thus, the inclusion of the sustainability goal has generated very little worsening in the achievement of the financial goals and a slight improvement in the achievement of the sustainabihty goal. These results do not conflict with recent research which find that there is no significant difference in how the securities are allocated between socially responsible and conventional financial mutual funds (Utz et al, 2014).…”

“…Afterwards, the performance of the portfolios obtained are compared with those derived from a selection process among a more general set of companies (i.e., those socially responsible or not). Another authors follow a slightly different orientation by undertaking the portfolio selection problem from conventional as well as from socially responsible mutual funds for comparative purposes (see Utz, Wimmer, Hirschberger, and Steuer (2014)). …”

Ethical requirement and financial interest: a literature review on socially responsible investing

“…Once a social rating approach is agreed upon, an interesting research question is whether SRI vehicles are really more SR than their conventional counterparts. Utz et al (2014) use in their study the ESG scores from the rating agency Inrate. They compare 105 SRI funds with 82 conventional funds for the years 2009 and 2010 and find that the SRI funds have significantly higher ESG scores than the analyzed conventional funds.…”

Are they any good at all? A financial and ethical analysis of socially responsible mutual funds

“…In this paper, we examine a broad sample of SR and conventional mutual funds from the United States with respect to both their nancial and ethical performance. Akin to our study is Utz et al (2013), who put emphasis on implicit risk tolerances of SR mutual funds using an elaborated multi-criterial decision model though. We attach a different focus to this paper and contribute to the literature in two ways.…”