Ympäristö- ja luonnonvarataloustieteen kollokvio
Efficient Portfolio Diversification according to Stochastic Dominance Criteria: Applications to Mixed-Asset Forest Portfolio Management and Environmentally Responsible Mutual Fund
(the presentation will be held in Finnish)
Ph.D. Timo Kuosmanen, Wageningen Universit
Aika: Keskiviikko 15.10.2003 klo 15.15-
Paikka: Helsingin yliopisto, Viikki, Latokartanonkaari 9,
Taloustieteiden talo (vanha A-talo), ls B5
Abstract
The theoretically appealing Stochastic Dominance (SD) criteria have thus far suffered from their inability to account for portfolio diversification. In this paper we show how the problem can be avoided by re-expressing the SD criteria in terms of dominating sets in the T-dimensional Euclidean space with elements representing rates of return in T different states of nature. Following this approach, we develop the first operational tests of portfolio efficiency in terms of SD that account for the infinite set of diversification possibilities.
The new method is then applied to two empirical cases in the field of environmental and natural resource economics. First, we examine portfolio diversification in the management of a mixed-asset forest portfolio. The forestry decision-making and harvesting problems are considered from the perspective of financial portfolio management, where mature harvestable forest stands constitute one of the liquid assets of the portfolio. Using real data from Finnish mixed boreal forests and from the Helsinki stock exchange, the effect of side constraints on the acquisition of additional timber stock on the portfolio efficiency is investigated. The results shed new light on the question of how to model the forestry planning problem, and provide some evidence of the applicability of the alternative SD test approaches.
Second, we compare portfolio efficiency of environmentally responsible mutual funds with efficiency of traditional equity funds. In theory, screening assets based on non-financial criteria is an additional constraint for the fund manager and can only deteriorate the performance of the fund. On the other hand, many studies suggest that firm's environmental performance is positively correlated with the stock market returns, so environmental screening could be a useful way of filtering out risky investments. We shed some new light on this issue by calculating inefficiency premia for a sample of 57 US based growth equity funds that follow similar investment strategy regarding growth and risk.
Tervetuloa,
Anni Huhtala (MTT), Jari Kuuluvainen (HY), Markku Ollikainen (HY), Olli
Tahvonen (Metla), Lauri Valsta (HY), Esa-Jussi Viitala (Metla)
