Portfolio Selection in the Yield and Semi-Absolute Deviation Space with the Incorporation of an Environmental Indicator

Abstract

Different portfolio models can be used to determine an investor's optimal strategy, diversifying assets to reduce the overall risk of the investment under consideration. In general, the main objectives of portfolio models can be identified as a minimized risk and maximized return. In the case of risk minimization, an investor can use different risk measures. In the paper presented, investment risk is considered to be the semi-absolute deviation from the expected return. Since the focus is also on sustainable investing, the model considered is extended to include environmental burden conditions on the investment based on the E indicator from the ESG indicators concept. It is generally assumed that the implementation of environmental criteria may be associated with increased risk, but even so, sustainable investing may be attractive to the investor for various reasons and the difference in risk between conventional and sustainable investing may not be significant. A possible way of applying the above approach is implemented by the authors on the assets of the Dow Jones Industrial Average (DJIA) stock index.