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| Type | Bachelor's Thesis |
| Scope | Discipline-based scholarship |
| Title | Risk and Return of Sin Stock Investments |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 64 |
| Date | 2016 |
| Zusammenfassung | Problem background: At the current state of science, finding an implementable investment strategy that produces returns which cannot be explained by different risk factors is a challenging task. In the presence of a high demand for socially responsible investing, the reported performance of companies that produce morally questionable products, so called sin stocks, seems to be promising. However, prior research lacks comparability due to the different methodologies applied in the experiments and shows varying results. The aim of this thesis is therefore to analyze whether the observed outperformance can be exploited by an implementable investment strategy, applying certain requirements on the liquidity of the underlying securities and accounting for transactions costs. Furthermore, the profitability across regions, industries and different market conditions should be tested for possible dissimilarities. This should give to further insights for future investment strategies also with respect to socially responsible investing which refrains from allocating capital to these stocks. Methodology: Therefore, the stocks were selected according to their industry classification and a sample of European and US sin stocks and two separate regional ones were created. From each of these samples four equally-weighted portfolios, investing only in alcohol, defense, gambling or tobacco companies and one containing all industries were constructed, resulting in a total of fifteen portfolios. During this process the stocks were evaluated on a quarterly basis whether they had fulfilled the liquidity requirements and were hence eligible for investment. In a next step, was the performance of the different portfolios calculated for the sample period from 2002 to 2015, using survivorship bias-free, daily total return index data, which accounted for capital actions and dividends. From these returns, key financial statistics regarding the risk and return characteristics of the different portfolios were computed. Thereafter, ordinary least squares regressions were run, regressing the portfolios’ net return on market, size, value, momentum and low beta factors. The same was done for different periods of high and low volatility, classified by the CBOE SPX VOLATILITY VIX and bull as well as bear markets, defined using MSCI WORLD price index data. The different results were then evaluated and compared. Findings: The analysis showed that an investment strategy investing in alcohol, defense, gambling and tobacco companies over the period from 2002 to 2015 yielded an average annual return of 13.27%, compared to 7.14% of the benchmark. This return survived the regression accounting for all five factors and resulted in an annual alpha of 3.37%. |
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