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Article

Risk-Adjusted Returns of Socially Responsible Mutual
Funds: How Do They Stack Up?

Bruce A. Costa, Keith Jakob and Scott J. Niblock
The Journal of Index Investing Winter 2011, 2 (3) 94-107; DOI: https://doi.org/10.3905/jii.2011.2.3.094
Bruce A. Costa
is an associate professor of finance at the School of Business Administration at the University of Montana in Missoula, MT.
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  • For correspondence: bruce.costa@business.umt.edu
Keith Jakob
is Donald and Carol Jean Byrnes Professor of Finance at the School of Business Administration at the University of Montana in Missoula, MT.
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  • For correspondence: keith.jakob@business.umt.edu
Scott J. Niblock
is a lecturer of finance at Southern Cross Business School at Southern Cross University in Bilinga, Australia.
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  • For correspondence: scott.niblock@scu.edu.au
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Abstract

This article establishes index suitability on a risk-adjusted basis for socially responsible investment (SRI) mutual funds that specify small-to-mid- or large-capitalization indexes as their performance benchmarks. Using a four-factor model, the authors calculate factor loadings for SRI mutual funds and their specified benchmark index and measure deviations with respect to the risk factors in the model using the authors’ F-test methodology. The results indicate that SRI mutual fund managers may not be selecting benchmark indexes that are true reflections of the risk characteristics associated with the funds’ investment activities, thus overstating or understating risk-adjusted performance. By considering alternative approaches to abnormal performance measurement, researchers can significantly change their conclusions regarding the economic contribution of SRI mutual fund managers. By applying similar methodologies, market participants may be able to more accurately assess risk-adjusted SRI fund manager performance and SRI-fund-specific risk characteristics relative to the benchmark index selected by the manager or other appropriate benchmark indexes. As a result, sustainable investors and funds managers will be more likely to accurately assess risk-adjusted performance relative to an appropriate benchmark.

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The Journal of Index Investing: 2 (3)
The Journal of Index Investing
Vol. 2, Issue 3
Winter 2011
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Risk-Adjusted Returns of Socially Responsible Mutual
Funds: How Do They Stack Up?
Bruce A. Costa, Keith Jakob, Scott J. Niblock
The Journal of Index Investing Nov 2011, 2 (3) 94-107; DOI: 10.3905/jii.2011.2.3.094

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Risk-Adjusted Returns of Socially Responsible Mutual
Funds: How Do They Stack Up?
Bruce A. Costa, Keith Jakob, Scott J. Niblock
The Journal of Index Investing Nov 2011, 2 (3) 94-107; DOI: 10.3905/jii.2011.2.3.094
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