Barely Legal; Highly profitable

Abstract: In the world of finance, companies are assessed, in theory, by expected risk and return based on fundamental valuation techniques. In this study we show that fundamentals are being suppressed around the world by social norms and moral standards. We support our theory by creating portfolios consisting of publicly traded stocks within sectors that are considered unethical and then compare their historical performance to their normal counterparts and to an ethically screened portfolio. We find the much sought after Alpha in three out of four sin stock portfolios as well as the total sin portfolio with a statistical significance level of at least 5 percent. We also test for arbitrage opportunities between the portfolios and find it in one of the industries with at least 10 percent significance level.