Market Efficiency and Unethical Investments

Mads Tvermose Nielsen & Stefan German

Student thesis: Master thesis


We are living in times, where more and more consideration is given to the social responsibility of the companies we deal with in our everyday lives. This is evident from the multitude of sustainability reports published by companies, and it carries over to how we invest. This has resulted in an emergence of investment funds, which refuse to invest in companies, that can be considered unethical. This constricts how some investors may choose to, or be forced to invest, which raises the question of whether investors that do not face these constrictions can exploit this skew in the market. The report investigates the presence of abnormally large returns, when investing in a portfolio of stocks that can be considered unethical. This is investigated in the framework of the CAPM, where portfolios of stocks are created from historical data, varying in their definition of unethical stocks, geographical scope and weighting scheme used for the stocks in the portfolios. The report makes use of Sharpe-ratios in addition to the alphas of the CAPM, to support the findings. It is found that it is possible for investors, who are not facing the mentioned constraints, to make abnormally large returns. The scope of these abnormally large returns are however not as broad as initially theorized in this paper, and are concentrated on a limited number of industries, and varies depending on their geographical scope. Generally portfolios of only US stocks perform better measured in a CAPM setting, but more global portfolios have better Sharpe-ratios. The returns are not stable over time and some indications are found that the possibility of profiting from the strategies of the report seem to disappear in recent times for some of the portfolios. The implications of this report is that it could spur further research into the investigation of adding a new risk-factor into the general framework of CAPM and other risk-factor models. The portfolios of the report can be easily recreated, and may provide investors with a way to ”beat the market”.

EducationsMSc in Finance and Investments, (Graduate Programme) Final ThesisMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2017
Number of pages153
SupervisorsBjörn Preuss