Electronic Thesis and Dissertation Repository

Degree

Master of Science

Program

Applied Mathematics

Supervisor

Matt Davison

Abstract

Socially responsible investment funds make up a growing segment of the investment world. This work considers the impact of including SRI in an investor portfolio both normally and during crisis times. Regimes are identified using Markov switching models. This study is based on return data of four indices, namely, the MSCI World Index, S&P 500, Eurostoxx 50, and the socially responsible index - Advanced Sustainable Performance Index (ASPI). The approaches used are portfolio optimization, GARCH and Markov switching models. Our work shows that a socially responsible index is a good asset to keep in a portfolio. Our simulation results suggest that a very risk-averse investor during the time period between 1992 to 2009 might allocate up to 75% of his portfolio in socially responsible index. We also present a framework which uses binary integer programming to construct a social index designed to prepare optimal diversification from a fixed given equity index.


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