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Ethical Investment and Portfolio Theory: Using Factor Analysis to Select a Portfolio

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DOI: 10.4236/jmf.2013.31A014    3,997 Downloads   8,155 Views   Citations

ABSTRACT

Ethical investments are a now a considerable sector in the investment market, with the Financial Times running the headline “Green and ethical investment comes of age” (Shepherd, [1]). Claudia Quiroz (lead fund manager for Cheviot Climate Assets Fund) predicts a strong future for ethical investment, with sustainable investment becoming a growing theme (Hoskin [2]). Much previous research in the ethical investment field divides investments into two categories: acceptable or unacceptable. This paper builds on the work of Barracchini and Addessi [3], in viewing how ethical an investment is to be a different dimensioneach investment is seen as being on a continuum, from least ethical to most ethical. This paper takes the work of Barracchini and Addessi [3] from a theoretical construct to an approach which can be applied by practitioners. In order to make a workable method, this paper uses conventional portfolio analysis (which focus on risk and return), combined with principal components analysis in order to minimize the risk of a portfolio. It adopts a specific functional form for the saver’s utility function, to assess which assets appears most desirable using that person’s values.

 

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

J. Simister and R. Whittle, "Ethical Investment and Portfolio Theory: Using Factor Analysis to Select a Portfolio," Journal of Mathematical Finance, Vol. 3 No. 1A, 2013, pp. 145-152. doi: 10.4236/jmf.2013.31A014.

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