Change search
CiteExportLink to record
Permanent link

Direct link
Cite
Citation style
  • apa
  • harvard1
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf
Including ESG concerns in the portfolio selection process: An MCDM approach
KTH, School of Engineering Sciences (SCI), Mathematics (Dept.), Optimization and Systems Theory.
KTH, School of Engineering Sciences (SCI), Mathematics (Dept.), Optimization and Systems Theory.
2014 (English)Independent thesis Basic level (degree of Bachelor), 10 credits / 15 HE creditsStudent thesisAlternative title
Portföljoptimering som inkluderar miljö-, sociala- ochbolagsstyrningsfrågor (Swedish)
Abstract [en]

In recent years investors in the financial markets around the globe have begun to focus on non-financial factors in their portfolio selection processes. Three main areas of concerns are: Environmental, Social and corporate Governance (ESG). Previous research has mainly focused on implementing these concerns using qualitative methods, e.g. negative screening. Our thesis integrates these concerns in a Multi-Criteria Decision-Making (MCDM) framework, making it possible for investors to view the portfolio selection as a trade-o_ between three criteria: Return, Risk and ESG. This extends the traditional Markowitz frontier from two to three dimensions. Companies included are the ones in the index OMXS30. Return and risk are estimated using the single-index model. The ESG criterion is implemented as a linear function and estimated using two public ESG indices.

We will use two different optimization methods, the weighted sum approach and the "-constraint method to compute the efficient frontier. These are evaluated and we conclude that each method has its own strengths and weaknesses. We can see that integrating ESG concerns as a third objective in addition to risk and return alters the portfolio selection process. It increases the complexity of choosing a portfolio, but also yielding a better decision basis for the investor. To mitigate the increase of complexity we propose the ESG-to-variability ratio in analogy with the Sharpe ratio, effectively reducing the number of portfolios an investor should consider.

 

Abstract [sv]

Under senare år har investerare på världens finansiella marknader fått upp ögonen för icke-finansiella faktorer och hur dessa kan inkluderas i portföljvalsprocessen. Tre områden står i fokus: miljö-, sociala och bolagsstyrningsfrågor (på engelska förkortat ESG). Tidigare forskning har framför allt fokuserat på hur dessa faktorer kan implementeras genom att använda kvalitativa metoder som t.ex. negativ screening. Vår uppsats integrerar dessa faktorer i ett Multi- Criteria Decision-Making (MCDM) framework, vilket möjliggör för investerare att se på portföljvalsprocessen som en avvägning mellan tre kriterier: Avkastning, Risk och ESG. Detta leder till att den traditionella Markowitzfronten utökas från två till tre dimensioner. De företag som inkluderats ar de som ingår i OMXS30. Risk och avkastning skattades genom att använda singleindexmodellen. ESG kriteriet ar implementerat som en linjär funktion och skattat genom att använda två publika ESG-index.

För att beräkna den effektiva fronten använder vi två optimeringsmetoder: the weighted sum approach och the ε-constraint method. Dessa utvärderas och vi drar slutsatsen att respektive metod har såväl styrkor som svagheter. Vi kan se att ett inkluderande av ESG som en tredje målfunktion, utöver risk och avkastning, förändrar portföljvalsprocessen. Komplexiteten vid portföljval ökar, samtidigt som investeraren får ett bättre beslutsunderlag. För att lindra ökningen av komplexitet så introducerar vi the ESG-to-variability ratio i analogi med Sharpe ratio, vilket effektivt reducerar antalet portföljer en investerare bör välja emellan.

Place, publisher, year, edition, pages
2014.
Series
TRITA-MAT-K, 2014:13
National Category
Mathematical Analysis
Identifiers
URN: urn:nbn:se:kth:diva-146745OAI: oai:DiVA.org:kth-146745DiVA: diva2:725585
Subject / course
Applied Mathematical Analysis
Educational program
Master of Science in Engineering - Industrial Engineering and Management
Supervisors
Examiners
Available from: 2014-06-16 Created: 2014-06-15 Last updated: 2014-06-16Bibliographically approved

Open Access in DiVA

fulltext(2672 kB)442 downloads
File information
File name FULLTEXT01.pdfFile size 2672 kBChecksum SHA-512
2c68beef2507796ebc17ebf432e2249183250755143cca2cd140442b53fc7aa9b8b90c44c9ba1e5ca2117c33c52ac14afc295c4f9750653c8250a8d5039d181d
Type fulltextMimetype application/pdf

By organisation
Optimization and Systems Theory
Mathematical Analysis

Search outside of DiVA

GoogleGoogle Scholar
Total: 442 downloads
The number of downloads is the sum of all downloads of full texts. It may include eg previous versions that are now no longer available

urn-nbn

Altmetric score

urn-nbn
Total: 1711 hits
CiteExportLink to record
Permanent link

Direct link
Cite
Citation style
  • apa
  • harvard1
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf