ETHICAL INVESTMENTS : The cost of a clean conscience oropportunity to change the world?

Abstract: Problem background: Swedish savings in mutual funds have increased by 53 times in 30 years, to a total of 3 837 billion kronor, where of a large share is through the Swedish pension system. A growing share of this capitalis invested in socially responsible investment products, where a popular approach is to use a negative screening to exclude companies based on ethical values. Problem statement: Are there any effects in terms of risk and return when investmentsare made using a negative screening for unethical companies? Arethere any differences during turbulent market conditions? Theory: This study is using Modern Portfolio Theory, pioneered by Harry Markowitz. It will be used to optimize and identify efficient portfolio based on expected return and risk under the assumption of a risk averse investor. The key is to minimize portfolio risk through diversification with low correlated assets, for each level of return. Methodology: I have used a deductive method with a quantitative approach. Using Bootstrap, a replication procedure with replacements, 4 000 optimal portfolios have been created from underlying holdings of OMX S30 Index and its corresponding ethical index, from two sets of market volatility. Paired sample t-tests have been performed to test for hypothesis significance. Result: There is a significant difference of risk-adjusted return using negative screening, regardless of market volatility. The risk adjusted return is relatively worse for ethical investments during high market volatility. Conclusions: The reduction of asset through negative screening, is a loss of potential risk-adjusted return because of diminishing diversification opportunities. Adjustments made to optimize ethical portfolios can attain at least as high optimal return but are instead penalized witha relatively higher expected risk.