Investing without conscience

Abstract

The chase for maximum returns is a race every investor participates in. The number of investing strategies is almost equal to the number of investors, and everyone claims that their strategy is the best. Socially responsible investing is a popular strategy and is gaining a lot of attention by the masses, investors are ready to pay a high premium for stocks that are considered ethical and have low impact on the environment. The opposite of this is to invest in companies operating in questionable moral sectors. These companies may be undervalued and perform better than the market as they are not often purchased at a premium.

This paper has examined the returns of a portfolio, only including companies that operates in these unethical sectors. The sectors have been selected by thorough research among peers and academics and are the following: Aerospace & Defense, Brewers, Casinos & Gaming, Distillers & Wineries and Tobacco. The returns of this portfolio were then compared to the S&P 500 index, an index chosen to represent the US market which this research is based on.

The comparison was measured by several ratios and calculations. These includes Sharpe ratio, Information ratio, Treynor ratio and Sortino ratio. The most comprehensive analysis was the ordinary least squares regression, this was also followed up by a T-test. Overall, the results indicates that the S&P 500 index performed better in all aspects. It had a lower risk and a higher return. All results were not statistically significant but after careful consideration and discussion the conclusion was made that the S&P 500 did perform better under the set time period.