Risk-adjusted returns of socially responsible mutual funds: how do they stack up?

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Costa, BA, K Jakob, & SJ Niblock, 2011, 'Risk-adjusted returns of socially responsible mutual funds: how do they stack up?', The Journal of Index Investing, vol. 2, no. 3, pp. 94-107.

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This article establishes index suitability on a risk-adjusted basis for socially responsible investment (SRI) mutual funds that specify small-to-mid- or large-capitalization indexes as their performance benchmarks. Using a four-factor model, the authors calculate factor loadings for SRI mutual funds and their specified benchmark index and measure deviations with respect to the risk factors in the model using the authors’ F-test methodology. The results indicate that SRI mutual fund managers may not be selecting benchmark indexes that are true reflections of the risk characteristics associated with the funds’ investment activities, thus overstating or understating risk-adjusted performance. By considering alternative approaches to abnormal performance measurement, researchers can significantly change their conclusions regarding the economic contribution of SRI mutual fund managers. By applying similar methodologies, market participants may be able to more accurately assess risk-adjusted SRI fund manager performance and SRI-fund-specific risk characteristics relative to the benchmark index selected by the manager or other appropriate benchmark indexes. As a result, sustainable investors and funds managers will be more likely to accurately assess risk-adjusted performance relative to an appropriate benchmark.

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