Abstract
This paper uses the concept of multivariate or multi-attributive utility to attach different risk aversion levels to different sources of wealth (e.g. sectors, stocks, asset classes). In this context, we address the topic of environmental, social, and corporate governance (ESG) investments from the perspective of an investor with different risk aversion levels to green and brown stocks. We obtain closed-form solutions for the optimal allocations, value function, and wealth equivalent losses (WEL) from suboptimal choices. The numerical analysis demonstrates the significant increase, of up to 33%, in green investments when accounting for a differential in risk aversions levels, with up to 65% in WEL when using same risk-aversion levels.11We deeply thank anonymous reviewers and journal’s leadership for very interesting suggestions on relevant papers, keywords, and ideas that have enriched this work.
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