Conventional Portfolio Research Articles

Is the ESG portfolio less turbulent than a market benchmark portfolio?

Given that there is no consensus on the fact that ESG portfolios are characterized by very high returns and very low risks compared to conventional portfolios, this study aims to empirically verify whether the series of returns of an ESG portfolio is less volatile than the returns of a benchmark market portfolio. To verify this hypothesis, we used the Markov-switching GARCH models in order to model the process of the series of daily returns of the ESG portfolio “MSCI USA ESG Select,” as well as those of the market benchmark portfolio daily returns series “S&P 500,” during the period June 01, 2005 to December 31, 2020 as well as that excluding the COVID19 crisis and from June 1, 2005 to October 29, 2019. It can be concluded that the ESG portfolio “MSCI USA ESG Select” is relatively less turbulentcompared to the market benchmark portfolio “S&P 500.”

Implications of Default Dependency on Portfolio Risk

We highlight important and specific characteristics of default risk and methodological implications. In a simulation contrasting independent, Gaussian and Clayton copulas, we also show that joint default probabilities might be a hidden source of risk in conventional portfolio models of default.

Revisiting Investability of Heritage Properties through Indexation and Portfolio Frontier Analysis

In recent years, the soaring prices of heritage properties in Georgetown, Penang have gained the attention of practitioners and investors. The practitioners claim that the prices of heritage properties within the core and buffer zones in Georgetown have increased more than 300% since the city was recognized as a UNESCO World Heritage site in 2008. Such heritage properties containing historical or art elements that lead to forming a diversified portfolio could exert a low correlation of returns with conventional assets. In addition, rehabilitation of heritage properties requires high restoration costs and conversion fees. Despite the above claims, there is an absence of empirical studies relating to heritage investability, particularly to prove whether the heritage properties are truly worth investing in. Thus, this study incorporates a self-developed heritage properties Index (PIHPI_HR) into the conventional investment portfolio for assessing diversification effects. This study has collected 853 units of transacted properties for constructing a 10-year price index (PIHPI_HR). Subsequently, its diversification effect was examined through the Efficient Frontier (EF), derived from the Modern Portfolio Theory (MPT). The findings have proven the optimization of the conventional portfolio by enabling investments in heritage properties where the return is higher than other investment assets at the same risk level. This study also unveiled the price movement of heritage properties together with their investment value, which is deemed to be useful for institutional investors and the public to formulate sustainable investment strategies in the future.

Hedging Dow Jones Islamic and conventional emerging market indices with CDS, oil, gold and the VSTOXX: A comparison between DCC, ADCC and GO-GARCH models

Our goal in this paper is to examine the time-varying optimal hedging ratios for the Dow Jones Islamic and conventional emerging stock market indices, hedged with oil, gold, and the VSTOXX as well as four emerging-country sectoral CDS indices (raw materials, industry, health care, and telecommunications). Using a rolling-window procedure with daily data, for the period from January 2000 to April 2019, along with, DCC, ADCC and GO-GARCH models as well as a hedging effectiveness criterion, we determine the best hedging instrument(s). Our findings prove that CDS indices are the best hedging instruments for both Islamic and conventional portfolios, as they have the highest hedging effectiveness. Our empirical results are robust to distribution assumptions and to the use of three MGARCH models in examining different refits (20, 40, and 60 days).

The environmental, social, and governance (ESG) dimension of firms in which social responsible investment (SRI) and conventional pension funds invest: The mainstream SRI and the ESG inclusion

This study seeks to understand whether the mainstream SRI leads to similar investment decisions in conventional and SRI pension funds. The SRI is expanding beyond specialised SRI funds and increasingly conventional pension funds are integrating firms with certain ESG criteria, in line with legitimacy-theory premises. This phenomenon raises the questions whether SRI and conventional portfolios are converging and whether SRI funds preserve their ethical essence. Using fund holdings and ESG-stock scores, we examine the inclusion level of ESG firms by UK conventional and SRI domestic equity pension funds, taking into account the investment in controversial (socially-sensitive) firms (i.e. related to tobacco, alcohol, or gambling industries, among others). We find that conventional funds consider the firms in which SRI funds invest to integrate ESG criteria. Nonetheless, SRI funds maintain larger ESG-firm standards, preserving the ethical purpose, and larger ESG standards in SRI funds do not affect performance. Our results also show that the ESG integration into conventional funds evolves over time.

Is there a diversification “cost” of Shari’ah compliance? Empirical evidence from Malaysian equities

Islamic equity portfolios work with a smaller investment universe given the filtering of non-Shari’ah compliant stocks. It has been theoretically argued that this culminates in suboptimal portfolio diversification, which in turn adversely affects risk-adjusted returns. We offer empirical evidence that such a conceived portfolio diversification “penalty” is far from a foregone conclusion, at least empirically. Our results tend to indicate that Islamic portfolios are not invariably handicapped in terms of portfolio diversification. We also explored dimensions that may account for differences in the relative investment performance between Islamic and conventional portfolios, such as portfolio constraints, short selling and market conditions. We believe this paper is among the first to apply substantial empirical analysis specifically with respect to the portfolio diversification perspective on Islamic equity investments.

Decoding Systematic Relative Investing: A Pairs Approach

We propose a novel theory that brings to light three fundamental performance drivers of zero-cost systematic investment strategies: (1) high (positive) own-asset signal-return predictability; (2) low (or negative) cross-asset signal correlation; and (3) low (or negative) cross-asset signal-return predictability. We develop these insights in the context of long-short pair strategies used as portfolio building blocks. We test our approach empirically using momentum signals for major asset classes, though our method can generalize to any signal. Our investable pairs-based portfolio harvests over double the average returns of a conventional rank-based portfolio over the last 20 years.

On Imposing ESG Constraints of Portfolio Selection for Sustainable Investment and Comparing the Efficient Frontiers in the Weight Space

Sustainable investment is typically fulfilled by screening of environmental, social, and governance (ESG); the screening strategies are practical and expedite sustainable-investment development. However, the strategies typically build portfolios by a list of good stocks and ignore portfolio completeness. Moreover, there has been limited literature to study the portfolio weights of sustainable investment in the weight space. In such an area, this article contributes to the literature as follows: We extend a conventional portfolio-selection model and impose ESG constraints. We analytically solve our model by computing the efficient frontier and prove that the frontier’s portfolio weights all lie on a ray (half line). By the ray structure, we prove that portfolio selection for sustainable investment and conventional portfolio selection fundamentally possess highly different portfolio weights. Overall, our aim is comparing the portfolio weights of sustainable portfolio selection and of conventional portfolio selection; the comparison result has been unknown until now. The result is important for sustainable investment because portfolio weights are the foundation of portfolio selection and investments. We sample the component stocks of Dow Jones Industrial Average Index from 2004 to 2013 and find that our efficient frontier and the conventional efficient frontier are quite similar. Therefore, in plain financial language, investors can still obtain risk-return performance similar to conventional portfolio selection after imposing strong ESG requirements, although the portfolio weights can be totally different. The result is both an endorsement and a reminder for sustainable investment.

Heuristic Based Low Volatility Portfolio for Retail Investors in Malaysian Stock Market

Heuristics based low volatility portfolio construction is a straightforward investment strategy that could be implemented by retail investors in the stock market. This study examines the performance of low volatility portfolio for Shariah and conventional stock portfolios. Specifically, this study back tests the profitability of low volatility portfolio using 15 Shariah and conventional stocks that are listed on Bursa Malaysia using data from January 2014 until December 2018. Combination of large, mid, and small capital firms are included in the study to highlight the difference in portfolio concentration within firm size classification. The results show that, the return of conventional portfolio and shariah compliant portfolio is not statistically different. However, the risk in shariah compliant portfolio is statistically higher than the conventional portfolio. Both portfolios give better annualized return and holding period return than their respective benchmark. Thus, retail investor could take advantage of the strategy to generate abnormal return. For investors that focus on shariah compliant investment only, even though the portfolio has slightly higher risk than the conventional counterpart, this strategy is still worth considering. However, it is advisable for investor to monitor portfolio risk regularly to avoid excessive risk taking and to include more shariah compliant large cap stocks in the portfolio.

A nonparametric approach to portfolio shrinkage

This paper develops a shrinkage model for portfolio choice. It places a layer on a conventional portfolio problem where the optimal portfolio is shrunk towards a reference portfolio. The model can accommodate a wide range of portfolio problems with various objectives and constraints, and its implementation is simple and straightforward. A data-driven method to determine the shrinkage level is offered. A comprehensive comparative study suggests the proposed model substantially enhances the performance of its underlying model and outperforms existing shrinkage models as well as the naïve strategy. The naïve strategy serves better as the reference portfolio than the current portfolio.

Portfolio optimization in the era of digital financialization using cryptocurrencies

The Fourth industrial revolution has seen many innovative technologies that are now challenging traditional economies. The innovative and technological financial instruments are inspiring individuals and expert investors to investigate the broader investment spectrum, and consequently diversify their portfolios. Going beyond the conventional portfolios and developing state-of-the-art strategies that comply with the ever-changing financial and technological advancements are the keys to long term sustainability. Therefore, to cater to the needs of all segments of the society, the investment strategies during the fourth industrial revolution demand exposure to technological and digital financial innovations. This study investigates the impact of diversification with the addition of five cryptocurrencies from November 2015 to November 2019 on four traditional asset portfolios. The results show that the diversification increased the returns in most of the cases, and reduced the portfolio volatility in all portfolios, and also provided higher returns as compared to the traditional portfolios for the same level of risk. This study also revealed that the results might improve when short sales are allowed. Moreover, we can conclude that the addition of multiple cryptocurrencies in a portfolio provides enhanced results for diversification, and Ethereum provides a better diversification opportunity as compared to Bitcoin.

Sustainable and responsible investment portfolio performance analysis in Indonesia Stock Exchange

This study is intended for knowing the Sustainable and Responsible Investment (SRI) stock portfolio performance in the Indonesia Stock Exchange (IDX). SRI is a concept where the investor is not only considering financial performance, but also non-financial aspects in the company such as Environmental, Social, and Governance (ESG). The main objective of this study is to compare the performance of the SRI portfolio with the performance of comparable portfolios. Is the performance of the SRI portfolio in IDX better than conventional portfolio and Islamic portfolio? To answer this question, the SRI portfolio will be formed from SRI-KEHATI Index (SRI), a conventional portfolio will be formed from the LQ45 index, and the Islamic portfolio will be formed from Jakarta Islamic Index (JII). The performances of those three portfolios will be compared based on alpha value, Sharpe Ratio, Treynor Ratio, and Sortino Ratio. This study result shows that the SRI portfolio performance in IDX is better than the conventional portfolio and Islamic portfolio. That performance occurs because the average of SRI portfolio excess return has positive value during the study period. JEL Classification: F64, G11, G32 DOI : https://doi.org/10.26905/jkdp.v24i3.4338

Effects of Facebook-based e-portfolio on ESL learners’ writing performance

ABSTRACT One recent development in writing pedagogy is the use of Web 2.0 technologies such as Facebook. Although there have been a lot of studies on Facebook use in writing classrooms, very few studies have explored it as an e-portfolio platform. Thus, this quasi-experimental study attempted to investigate the effects of Facebook-based e-portfolio on L2 learners’ writing performance. The study involved 89 L2 English students from four English classes. Two classes were assigned to the treatment group (N = 48) which used a Facebook-based e-portfolio, while the other two were assigned to the control group (N = 41) which was exposed to a conventional portfolio. Using both quantitative and qualitative data, findings demonstrated that students who used the Facebook-based e-portfolio have outperformed those from the conventional portfolio group. These results were attributed to Facebook’s interactive features, flexibility, accessibility as well as its ability to expose students to social pressure and increase their audience awareness. Implications for L2 writing, assessment, and future studies are discussed.

Social Preferences of Investors and Sustainable Investing

I study portfolio sustainability and capital flow dynamics in socially responsible and conventional mutual funds. I document that a large fraction of conventional funds systematically invests sustainably even without a social mandate, while several socially responsible funds persistently green-wash. Both conventional and socially responsible investors value sustainability as they reward sustainable fund portfolios, but they do not punish weak social performance to the same extent that they reward strong social performance. Socially responsible investors respond to portfolio sustainability only when the fund performs poorly financially. As a result, much green-washing goes unpunished. Further, sustainable portfolios do not financially outperform conventional portfolios, suggesting that investors value sustainability for non-economic reasons.

Deterministic goal programming approach for Islamic portfolio selection

To our knowledge, this paper presents the first attempt to construct a Shari’ah compliant multiple goals program to address the portfolio selection problem from a conventional portfolio viewpoint. We have applied our model, based on deterministic values, to monthly equity data from 60 financial institutions in Gulf Cooperation Council economies, from 2006 to 2016. Our results show that investors gained higher returns from our Shari’ah compliant portfolios than from conventional portfolios. Thus, Shari’ah investments can benefit not only Islamic investors but also conventional and ethical investors, confirming our belief that conventional investors would benefit from considering ethical investments in their investment strategies.

Performance analysis of Islamic and conventional portfolios: The emerging markets case

This paper compares the performance of Islamic, conventional, and mixed (Islamic-conventional) optimal international portfolios from the viewpoint of an American investor across tranquil and crisis regimes. The dataset consists of closing prices on MSCI Islamic stock indices and their conventional counterparts in the US and 15 emerging markets in three regions (Latin America, Europe, and Asia) over the period from June 2002 to February 2017. The methodology is based on the Markov regime-switching model and the Ledoit and Wolf (2008) Sharpe ratios difference test. Generally, the results show a difference in performance between conventional, Islamic, and mixed portfolios but it is not statistically significant. Hence, investors will not be worse off by choosing Islamic indices rather than conventional ones.

Optimal investment portfolio selection from the largest Ukrainian companies: comparative study of conventional and responsible portfolios

This paper is devoted to the comparing stock portfolios of the largest conventional and responsible Ukrainian companies as the basis for substantiating the structure of an optimal investment portfolio in the current conditions of development of the financial market of Ukraine. The empirical basis of the research was the data of quotations of shares of 6 most liquid conventional and 6 responsible companies in the Ukrainian and Warsaw exchanges. The methodological basis of calculations was the classic Markowitz portfolio optimization model. The key hypothesis of the research was to check that the conventional investment portfolios of Ukrainian companies outperform the responsible investment portfolios by their parameters (return, risk). This hypothesis was rejected. The obtained results have not only theoretical significance – both the rationale for the threat of responsible investment in Ukraine and the applied value for market participants in terms of investment decisions making, taking into consideration the ESG criteria, and the formation of investment portfolios from shares of the responsible companies, the key parameters of which exceed the conventional portfolios.

Islamic and conventional portfolios optimization under investor sentiment states: Bayesian vs Markowitz portfolio analysis

This paper investigates the portfolio optimization under investor’s sentiment states of Hidden Markov model and over a different time horizon during the period 2004–2016. To compare the efficient portfolios of the Islamic and the conventional stock indexes, we have employed two approaches: the Bayesian and Markowitz mean-variance. Our findings reveal that the Bayesian efficient frontier of Islamic and conventional stock portfolios is affected by the investor’s sentiment state and the time horizon. Our findings also indicate that the investor’s sentiment regimes change the Islamic and the conventional optimal diversified portfolios.Moreover, the results show that the potential diversification benefits seem to be more important when using the Bayesian approach than when applying the Markowitz approach. This finding is valid for the bearish, depressed, bullish and calm states in Islamic stock markets. However, the diversification of potential portfolios is significant only for the bullish and the bubble states in the conventional financial markets.The findings of the study provided additional evidence for investors to exploit googling investor sentiment states to evaluate the portfolio performance and make an optimal portfolio allocation.

The Inclusion of Socially Irresponsible Companies in Sustainable Stock Indices

Social rating agencies implement complex filters to identify the companies with the best sustainable and social performance and help investors select the companies for their sustainable portfolios. This study analysed whether companies that are defined as ethical, sustainable and socially responsible by those agencies actually deserve this label. More specifically, the inclusion in the prestigious Dow Jones Sustainability Index (DJSI) World of companies that have been involved in controversies according to the Thomson Reuters Eikon database was studied. The results show that the inclusion of irresponsible companies in the DJSI Index is a fact. This outcome is in line with previous studies that criticise the methodologies applied by social rating agencies and those which outline the similarity of sustainable and conventional portfolios. The results may explain the contradictory conclusions regarding the performance of sustainable and conventional mutual funds in numerous studies.

Faith-based norms and portfolio performance: Evidence from India

This paper investigates the performance of Shariah and conventional stock portfolios in India during the period 2001–2017 by using asset pricing models. We first examine the influence of Shariah investment principles on the stock returns' cross-section. Then we assess the overall risk of Shariah and conventional portfolios, focusing also on financial crises. We provide evidence of a positive Shariah effect on stock returns in India. Therefore, Shariah stocks offer higher returns than non-Shariah stocks. We also find that Shariah portfolios have lower risk than unconstrained conventional ones. Overall our results reveal that both portfolios have similar performance, but the Shariah portfolio has a lower level of risk. Finally, the results clearly indicate that the volatility of the Shariah portfolio is lower during the crisis period.