1 Finance Research Group, Aarhus School of Business, Aarhus BSS, Aarhus University2 Department of Business Studies, Aarhus School of Business, Aarhus BSS, Aarhus University3 Department of Economics and Business Economics, Aarhus BSS, Aarhus University4 Department of Economics and Business Economics, Aarhus BSS, Aarhus University
The paper studies retail Socially Responsible Investment and portfolio allocation. It extends conventional portfolio theory by allowing for a personal value based investment decision. When preferences for responsibility enter the framework for mean-variance analysis, it yields an optimal responsible investment model. An example of index investing illustrates the theory. Results show that it is crucial for the responsible investor to consider portfolio risk, expected return, and responsibility simultaneously in order to obtain an optimal portfolio. The model enables responsible investors to benefit from their personal preferences and to remain rational actors in the financial market.