Mila Bravo

Socially responsible investment: A multicriteria approach to portfolio selection combining ethical and financial objectives

In a context of Socially Responsible Investment (SRI), this paper deals with portfolio selection for investors interested in ethical policies. In the opportunity set there are ethical assets and other assets which are not characterized as ethical. Two goals are considered, the traditional financial goal in the classical utility theory under uncertainty and an ethical goal in the same utility framework. A new financial-ethical bi-criteria model is proposed with absolute risk aversion coefficients and targets depending on the investor’s ethical profile. This approach is relevant as an increasing number of mutual funds are becoming interested in SRI strategies. From the proposed model, an actual case on green investment is developed. Concerning this case (without generalizing to other contexts), an analysis of the numerical results shows that efficient portfolios obtained by the traditional E-V model outperform the strong green portfolios in terms of expected return and risk, but this does not significantly occur with weak green investment.

Applying stochastic goal programming: A case study on water use planning

A decision support model to help public water agencies allocate surface water among farmers and authorize the use of groundwater for irrigation (especially in Mediterranean dry regions) is developed. This is a stochastic goal programming approach with two goals, the first concerning farm management while the other concerns environmental impact. Targets for both goals are established by the agency. This model yields three reduction factors to decide the different reductions in available surface water, standard groundwater and complementary groundwater that the agency should grant/authorize for irrigation, this depending on if it is a dry or wet year. In drought periods, the model recommends using more groundwater (in percentage) than in wet periods. A case study using year-to-year statistical information on available water over the period 1941-2005 is developed through numerical tables. A step-by-step computational process is presented in detail.

Portfolio optimization based on downside risk: a mean-semivariance efficient frontier from Dow Jones blue chips

To create efficient funds appealing to a sector of bank clients, the objective of minimizing downside risk is relevant to managers of funds offered by the banks. In this paper, a case focusing on this objective is developed. More precisely, the scope and purpose of the paper is to apply the mean-semivariance efficient frontier model, which is a recent approach to portfolio selection of stocks when the investor is especially interested in the constrained minimization of downside risk measured by the portfolio semivariance. Concerning the opportunity set and observation period, the mean-semivariance efficient frontier model is applied to an actual case of portfolio choice from Dow Jones stocks with daily prices observed over the period 2005–2009. From these daily prices, time series of returns (capital gains weekly computed) are obtained as a piece of basic information. Diversification constraints are established so that each portfolio weight cannot exceed 5 per cent. The results show significant differences between the portfolios obtained by mean-semivariance efficient frontier model and those portfolios of equal expected returns obtained by classical Markowitz mean-variance efficient frontier model. Precise comparisons between them are made, leading to the conclusion that the results are consistent with the objective of reflecting downside risk.

Photovoltaic power plants: a multicriteria approach to investment decisions and a case study in western Spain

This paper proposes a compromise programming (CP) model to help investors decide whether to construct photovoltaic power plants with government financial support. For this purpose, we simulate an agreement between the government, who pursues political prices (guaranteed prices) as low as possible, and the project sponsor who wants returns (stochastic cash flows) as high as possible. The sponsor’s decision depends on the positive or negative result of this simulation, the resulting simulated price being compared to the effective guaranteed price established by the country legislation for photovoltaic energy. To undertake the simulation, the CP model articulates variables such as ranges of guaranteed prices, technical characteristics of the plant, expected energy to be generated over the investment life, investment cost, cash flow probabilities, and others. To determine the CP metric, risk aversion is assumed. As an actual application, a case study on photovoltaic power investment in Extremadura, western Spain, is developed in detail.

Evaluating Loan Performance for Bank Offices: A Multicriteria Decision-Making Approach

Abstract This paper aims at evaluating loan performance of bank offices. For this purpose, a multicriteria decision support model given uncertainty is developed, in which the criteria to evaluate loan performance are the different discount rates which can be potentially used to compute the net present value (NPV) of each loan outflow and repayment inflow. This proposal is motivated by the fact that the true discount rate (opportunity cost of capital) is uncertain. The bank offices are classified in non-dominated and dominated by other bank offices in terms of loan performance from the multiple NPV criteria. As a further result, a complete ranking of the bank offices from their performance indexes is obtained. This ranking relies on a principle of moderate pessimism to solve uncertainty tables. Although the proposed method is applicable to various types of loans, the special class of personal loans is emphasised in the paper. As an actual case, a set of bank offices are evaluated from their loans and repayments during the period 2001–2010. Numerical data are tabulated together with the computing process and the results.

Robustness of weighted goal programming models: an analytical measure and its application to offshore wind-farm site selection in United Kingdom

This paper proposes a method to measure robustness of weighted goal programming (WGP) models by focusing on random percentage changes in the set of observed technological coefficients that characterize the goal equations. The issue under consideration is to estimate the impact of the random percentage changes on the WGP deviations from the goal targets, the solution to the model before changes being kept equal. Normally distributed and independent percentage changes are assumed. As a result, a measure of robustness is obtained dependent on the parameters of the model, standard deviations of percentage changes, and the solution to the model before changes. A demonstration of the proposed robustness measure on an offshore wind-farm site location model from the literature is developed. The results indicate that robustness of proposed solution to the energy project is high. Conclusions are drawn as to the practicality and usage of the proposed model in comparison to other methodologies for handling uncertainty within the goal programming model.

Profiling Ethical Investors

In the previous chapter we highlighted the important growth experienced by SRI especially remarkable after the 2008 financial crisis. In this context of growth it is important to know the profile of the important emerging group of investors willing to invest with social responsibility criteria, especially in countries like Spain, where this kind of investment is still marginal compared with countries like Australia which has a long SRI tradition. This chapter presents the results from a study designed to examine financial preferences, social, environmental, governance and ethical concerns and, socio-demographic characteristics and motivation of socially responsible investors. Based on an international online survey we analyse the degree of influence of a number of socio-demographic variables on the propensity for being a socially responsible investor. The study can be of great value for marketing researchers, institutional investors and fund managers attempting to identify those investors more receptive to SRI products. The information can also be used by advertising researchers to develop effective advertising campaigns.

Measurement of Assets’ Social Responsibility Degree

As we have seen in Chap. 3, one of the critical issues in SRI analysis is how to measure social responsibility levels of financial assets. Frequently, there is available disaggregated information on SRI strengths and concerns of assets from each socially responsible criterion. This information is usually provided by independent institutions like rating agencies. Most of the times the available data are presented in a disaggregated way and the individual investor has not got an aggregated indicator of the Social Responsibility Degree (SRD) of each asset. This indicator can be constructed in a subjective or objective way depending on the needs of each investor. In this chapter, we review the current practice and the most widely used methods in the academic literature mainly based on subjective approaches. In these approaches the aggregation weights depend on opinions and preferences of particular analysts, fund managers or investors.

An Actual Case of SRI Financial Portfolio Choice by MV-SGP

An illustrative example of ethical financial portfolio selection by MV-SGP model is developed through tables and numerical statements. Empirical data are real wide observations coming from international sources. This includes an opportunity set of 80 funds with historical series of weekly returns on the funds and SRI achievement indexes over 5 years time horizon. On this actual database, mean values vectors and covariance matrices are computed as a previous step required to formulate the objective function and constraints of the model. Since the computational structure of MV-SGP is the same as the computational structure of Markowitz-MV, the model is solved by using a Markowitz software application. The results are tabulated and discussed.