Do Socially Responsible Index Investors Incur an Opportunity Cost?

14 Pages Posted: 7 Jul 2012

See all articles by Ben S. Branch

Ben S. Branch

University of Massachusetts Amherst - Isenberg School of Management

Li Cai

Illinois Institute of Technology - Stuart School of Business, IIT

Date Written: August 2012

Abstract

We construct index‐tracking portfolios using integer programming and then compare the tracking errors and performances of portfolios formed from an unrestricted and socially screened stock universe. We find that one can construct a portfolio of socially responsible stocks that deliver market performance. Thus, the exclusion of a set of stocks from consideration does not exhaust the existence of efficient index‐tracking portfolios, especially when the exclusionary screen is for nonfinancial reasons. Our results are robust to various specifications in constructing the portfolio, for example, number of stocks included in the portfolio and weighting schemes, and robust to alternative tracking error measurement; we show that the difference induced from conducting socially responsible screen is never statistically significant.

Keywords: index tracking, socially responsible investment, tracking error, mixed integer programming

JEL Classification: G11

Suggested Citation

Branch, Ben S. and Cai, Li, Do Socially Responsible Index Investors Incur an Opportunity Cost? (August 2012). Financial Review, Vol. 47, Issue 3, pp. 617-630, 2012, Available at SSRN: https://ssrn.com/abstract=2101928 or http://dx.doi.org/10.1111/j.1540-6288.2012.00342.x

Ben S. Branch (Contact Author)

University of Massachusetts Amherst - Isenberg School of Management ( email )

Room 201A
Amherst, MA 01003-4910
United States
413-545-5690 (Phone)
413-545-3858 (Fax)

Li Cai

Illinois Institute of Technology - Stuart School of Business, IIT ( email )

Chicago, IL 60661
United States

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