Efficiency Evaluation and Selection Strategies for Green Portfolios under Different Risk Appetites

Abstract

Since investors have diverse risk motives for green investments, this paper uses data envelopment analysis (DEA) and simulation to accurately evaluate the efficiency of green portfolios from the perspective of investors’ subjective risks and accordingly provide suitable investment selection strategies. On the one hand, the paper integrates investors’ risk preferences with efficiency evaluation models under the framework of behavioral finance, and then constructs a green portfolio efficiency evaluation model based on cumulative prospect theory on the basis of defining green portfolio efficiency. On the other hand, by bringing realistic Chinese stock data into the evaluation model and solving it with the help of large number iteration and DEA, the trends of frontier movements and selection options of green portfolios under the influence of different risk preferences are obtained and analyzed. The empirical simulation reveals that: (1) if investors’ risk aversion at return rises, it will not only reduce the expected prospective value of the green portfolio, but also shift down and flatten the frontier of the green portfolio; indicating that investors will tend to reduce their risk-tolerant attitude and prefer a conservative strategy under the same value condition. (2) If investors increase their risk-seeking in the case of losses, this will raise the expected prospect value of the green portfolio and lead to an inward and steeper green portfolio frontier; suggesting that, given equal value, investors prefer to increase their risk-taking capacity and use aggressive strategies in the hope of turning the profit around. (3) The efficiency results of green portfolios are very sensitive to changes in investors’ risk preferences, suggesting that investors need to select and match green portfolios with their own risk appetite levels. The above findings enrich and expand the risk types and evaluation models in previous green investment studies from the perspective of investors’ subjective risk.

Socially responsible portfolios,environmental, social, corporate governance (ESG)efficient frontiers, and psychic dividends

“…ESG portfolios (Bertolotti, 2020; Ouchen, 2021) such as green (Anquetin et al, 2022; Yu et al, 2021) and sustainable (Arribas et al, 2019; Khan et al, 2020) portfolios do not leave aside traditional considerations of risk and return, but they are also influenced by emotional, psychological, and cognitive investor considerations (Nofsinger, 2017). Authors such as Beal et al (2005), Bollen (2007), Lewis and Mackenzie (2000), and Williams (2007) showed how personal values influence responsible investors' portfolio selection, generating for them what Ainsworth et al (2018) called psychic dividends, even giving up some profitability to meet their objectives.…”

“…ESG portfolios (Bertolotti, 2020;Ouchen, 2021) such as green (Anquetin et al, 2022;Yu et al, 2021) and sustainable (Arribas et al, 2019;Khan et al, 2020) portfolios do not leave aside traditional considerations of risk and return, but they are also influenced by emotional, psychological, and cognitive investor considerations (Nofsinger, 2017). Authors such as Beal et al (2005)…”

Optimal Portfolio with Sustainable Attitudes under Cumulative Prospect Theory

“…Then, they tested this approach through a real-world application on the European market. In parallel with the above study, (Yu et al, 2021) have selected the most promising assets according to their ESG score from the Chinese stock market to construct an ethical CPT-based portfolio. While these literature contributions build on deterministic quantities of sustainability (e.g., the ESG scores), (Dorfleitner and Utz, 2012) have introduced the concept of sustainable returns obtained from firms' ESG scores.…”

“…Then, we find the optimal portfolio weights according to the CPT-based asset allocation strategy. This approach generalizes the studies (Yu et al, 2021) and (Liagkouras et al, 2022). In the second model, we account for investors who could be sensitive to the ESG scores and the evolution of these values over time.…”

Inversión socialmente responsable: selección y administración de portafolios con criterios medioambientales, sociales y de gobierno corporativo (ESG)

“…Cuando se seleccionan activos usando simultáneamente criterios financieros y ESG, se conforma un portafolio "responsable", también llamado en la literatura portafolio ESG(Bertolotti, 2020;Ouchen, 2021) verde(Anquetin et al, 2022;Yu et al, 2021) o sostenible(Arribas et al, 2019;Khan et al, 2020). Esto implica que los portafolios responsables no dejan de lado el análisis de las variables financieras tradicionales de riesgo y rentabilidad, sino que agregan consideraciones sobre el desempeño ESG de las empresas, según las preferencias individuales del inversionista.La construcción de portafolios responsables incluye, entonces, elementos característicos de la optimización convencional, como la definición previa de una política de inversión, la determinación de objetivos de corto y largo plazo, el cálculo de riesgo y rentabilidad históricas, el análisis de las características del mercado, así como la evaluación del grado de tolerancia al riesgo, los cuales se evalúan a la luz de las consideraciones ESG.…”