Ethical investments are a now a considerable sector in the investment market, with the Financial Times running the headline “Green and ethical investment comes of age” (Shepherd, ). Claudia Quiroz (lead fund manager for Cheviot Climate Assets Fund) predicts a strong future for ethical investment, with sustainable investment becoming a growing theme (Hoskin ). Much previous research in the “ethical investment” field divides investments into two categories: acceptable or unacceptable. This paper builds on the work of Barracchini and Addessi , in viewing how “ethical” an investment is to be a different dimension—each investment is seen as being on a continuum, from “least ethical” to “most ethical”. This paper takes the work of Barracchini and Addessi  from a theoretical construct to an approach which can be applied by practitioners. In order to make a workable method, this paper uses conventional portfolio analysis (which focus on risk and return), combined with principal components analysis in order to minimize the risk of a portfolio. It adopts a specific functional form for the saver’s utility function, to assess which assets appears most desirable using that person’s values.
Cite this paper
J. Simister and R. Whittle, "Ethical Investment and Portfolio Theory: Using Factor Analysis to Select a Portfolio," Journal of Mathematical Finance
, Vol. 3 No. 1, 2013, pp. 145-152. doi: 10.4236/jmf.2013.31A014
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