Article2010

Faith‐based and sin portfolios

47 citations0/0 files storedManagerial Finance

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Abstract

Purpose The purpose of this paper is to investigate relative portfolio performance between sin stock returns and faith‐based returns. Design/methodology/approach Similar to Hong and Kacperczyk, Jensen's alpha was utilized to conduct tests along with three asset‐pricing models and rolling regression technique to reveal that faith‐based and sin betas move in opposite directions during most of the sample period. Findings Norm‐neglect was found, in that Jensen's alpha is positive and significant for the sin portfolio. Further, evidence in favor of norm‐conforming investor behavior was found, where Jensen's alpha is negative and significant for the faith‐based portfolio. These findings provide evidence that the sin portfolio outperforms the faith‐based portfolio relative to the market. A rolling regression technique reveals that faith‐based and sin betas tend to move in opposite directions during most of the sample period. The evidence suggests that faith‐based beta has an average estimated beta of one, mimicking the market. The sin portfolio, however, has an average estimated beta of one‐half. Finally, the reward‐to‐risk measure, Sharpe ratio, is statistically higher for the sin portfolio relative to the faith‐based portfolio. Originality/value This paper contributes to the literature in the following distinct ways. First, three asset‐pricing models are estimated to examine Jensen's alpha for sin and faith‐based portfolios. Second, a rolling regression procedure is used to examine the dynamic behavior relative to the market of the sin and faith‐based portfolios. Third, use is made of the Jobson and Korkie test, which allows for statistical comparisons of Sharpe ratios. Lastly, daily instead of monthly data and a different sample period are used to examine the research questions posed in this study.

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References

1993Common risk factors in the returns on stocks and bonds 1997On Persistence in Mutual Fund Performance 1981The relationship between return and market value of common stocks 1997Industry costs of equity 2009The price of sin: The effects of social norms on markets 1985Persuasive evidence of market inefficiency 1981Performance Hypothesis Testing with the Sharpe and Treynor Measures 2008Sin Stock Returns

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