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When a benchmark model is inefficient, including test assets in addition to the benchmark portfolios can improve the performance of the optimal portfolio. In reality, the efficiency of a benchmark model relative to the test assets is ex ante unknown; moreover, the optimal portfolio is constructed based on estimated parameters. Therefore, whether and how to include the test assets becomes a critical question faced by real world investors. For such a setting, we propose a combining portfolio strategy, optimally balancing the value of including test assets and the effect of estimation errors. The proposed combining strategy can work together with some existing estimation risk reduction strategies. In both empirical data sets and simulations, we show that our proposed combining strategy performs well. This paper was accepted by Agostino Capponi, finance. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2021.01767. [ABSTRACT FROM AUTHOR]

Small stocks' time‐varying spreads predict future return gap between small and large stocks. To optimally exploit such predictability, the investor captures current risk premium by purchasing at large spreads with substantially reduced turnover; uses an aim‐in‐front‐of‐the‐target approach to trade‐off between future risk premium and current transaction costs; and meets hedging demand at low costs. Strong interaction between transaction costs and return predictability leads to large losses from myopic trading. Greater variability of the spread is advantageous for investors who trade optimally but detrimental for investors who trade myopically. The spread‐based return predictability significantly increases the investment value of small stocks. [ABSTRACT FROM AUTHOR]

This paper examines equilibrium asset prices and leverage in an exchange economy populated with both retail and institutional investors. Institutional investors influence the price of the stocks they trade and are aware of the price impact of the opponent and, thus, interact strategically. Because of the price impact, institutional investors decrease their demand for stocks and lend money to the retail sector, thereby increasing leverage in the economy. The risk-free rate (equity premium) tends to be lower (higher) as compared to an economy populated by retail investors only. Retail investors' compensation for liquidity provision depends on the behavior of institutional investors and the state of the economy. [ABSTRACT FROM AUTHOR]

We investigate the impact of money illusion on the investment strategy and retirement outcomes of pre-retirees. Money illusion refers to the tendency of individuals to overlook the effects of inflation and focus on nominal rather than real terms. We solve and compare the optimal investment strategies for a pre-retiree who exhibits money illusion and aims to maximize the expected power utility of wealth at retirement, subject to a minimum guarantee constraint. While money illusion leads to welfare losses, implementing a minimum guarantee helps suppress these losses. However, guarantee constraints set under money illusion are ineffective in meeting inflation-adjusted constraints. Our findings emphasize the significant impact of money illusion on pre-retirees' investment strategy and retirement outcomes in the form of utility loss and the risk of falling short of the minimum guarantee. [ABSTRACT FROM AUTHOR]

This paper employs a multi‐asset allocation framework to analyse the short‐term and long‐term desirability of listed infrastructure investments in an investor's portfolio. We employ 14 infrastructure indices encompassing six regions and eight sectors. The asset menu of the investor comprises traditional financial asset classes (stocks, bonds and bills) and infrastructure. We calculate the welfare losses due to ignoring the demand for infrastructure for various levels of risk aversion. In addition, we calculate the portfolio weights across various levels of risk aversion. Our results show that infrastructure is a desirable addition to the portfolio of traditional financial asset classes for both short‐run and long‐run investors. [ABSTRACT FROM AUTHOR]

We propose an enhancement to the well-known market-based investor sentiment index by Baker, M., and J. Wurgler. (2006. "Investor Sentiment and the Cross-Section of Stock Returns." The Journal of Finance 61 (4): 1645–1680). The low forecasting power of that index for future aggregate stock market returns has long been a puzzle, and we demonstrate that its ability to empirically capture latent investor sentiment can be significantly improved by allowing contributions of its individual components to vary over time, rather than being fixed. Our enhanced index represents an improved measure of investor sentiment: empirically, we find that our sentiment index not only instils forecasting power to the original Baker and Wurgler (2006) index, it also outperforms competitor measures in empirically capturing unobservable sentiment. This superior empirical performance is demonstrated to be due to investors' irrational expectations about future discount rates. Lastly, sentiment measured by our enhanced index contains useful and unique information about future market returns, as it outperforms fundamental economic predictors in forecasting, in both the statistical and economic sense. [ABSTRACT FROM AUTHOR]

Do more intelligent investors take better economic decisions than less intelligent ones? Is risk attitude, in particular risk/loss aversion, linked to cognitive ability? Does an investor's cognitive ability impact his/her patience? Is financial performance positively linked to investor's intelligence? These research questions have become highly relevant with the development of behavioral economics and behavioral finance, following the recognition that humans are not homo economicus. This paper reviews the several strands of literature devoted to answering the above questions. We first discuss the barely debated definitions and measures of intelligence/cognitive ability used in psychology, economics, and finance. We then review the results related to the (controversial) link between risk aversion and cognitive ability. We observe that the literature provides clear results for patience; individuals with a higher level of cognitive ability being more patient on average. Finally, we review the contributions linking (successfully or not) portfolio choice and financial performance to cognitive ability. [ABSTRACT FROM AUTHOR]

We propose a general approximation method for the determination of optimal trading strategies in markets with proportional transaction costs, with a polynomial approximation of the residual value function. The method is exemplified by several problems, from optimally tracking benchmarks and hedging the log contract to maximizing utility from terminal wealth. Strategies are also approximated by practically executable, discrete trades. We identify the necessary trade-off between the trading frequency and trade size to ensure satisfactory agreement with the theoretically optimal, continuous strategies of infinite activity. [ABSTRACT FROM AUTHOR]

We study the effect of investment horizon on the optimal stock–bond–cash portfolio in a dynamic model with uncertainty about climate change. The stock risk premium is assumed to be an affine function of the average global temperature and an unobserved factor which is estimated via Bayesian learning. We assume that the probability distribution of future temperature is uncertain. The optimal investment strategy, robust to the uncertainty about climate change, is derived in closed form and analyzed for returns on the S&P500 index and the S&P500 ESG index. We find that stock market investment is quite sensitive to climate uncertainty with allocation to the S&P500 index being the most sensitive. We also show that, even for relatively short time horizons, welfare losses from climate uncertainty could be large for investments in either the S&P500 index or the S&P500 ESG index. [ABSTRACT FROM AUTHOR]

Rational household asset allocation is crucial for the accumulation of household wealth. However, there is still a widespread phenomenon of limited participation among households. This paper aims to explore the impact of the investment expectation gap on households’ risky financial asset investment. Utilizing data from the China Household Finance Survey 2019, this paper systematically investigates the role of the investment expectation gap in risky financial asset investment through the Probit and Tobit models. The study reveals that the investment expectation gap has a significant negative impact on the investment probability (Average Marginal Effect, –0.118, p < 0.01) and holding proportion (β, –0.082, p < 0.01) of household investment in risky financial assets. This conclusion remains robust after conducting robustness tests by replacing the explanatory variable and performing subsample tests and endogenous treatment. The analysis of transmission mechanisms revealed that an expanding of the investment expectation gap would concurrently result in a decline in households’ assessment of stock’s profitability (Average Marginal Effect, –0.080, p < 0.01), the satisfaction with current asset allocation (β, –0.167, p < 0.05), and the subjective well-being of household members (β, –0.289, p < 0.01). Furthermore, the investment expectation gap not only hampers household investment in risky financial asset, but also diminish the household savings rate (β, –0.055, p < 0.01). This study demonstrates that helping households form reasonable expectations for risky financial assets investment returns will contribute to diversifying household asset allocation and enhancing satisfaction with investment decisions. AcknowledgmentThis study is funded by the Chongqing Social Science Planning Fund, grant number (2021BS052).

The aim of this article is to evaluate the performance of investment portfolios built under environmental, social, and corporate governance (ESG) criteria or socially responsible portfolios, based on companies listed on three representative stock exchanges in Latin America (Chile, Colombia, and Peru) for the period 2011–2019. The performance of portfolios comprising high‐ESG stocks was compared with that of low‐ESG performance portfolios and with portfolios of companies that did not report such information, as well as against the main index of each market. A novel utility function was defined that allows evaluating different degrees of propensity to responsible investment, based on which restricted optimization processes were conducted to build efficient frontiers that combine traditional mean–variance aspects with ESG elements. Based on these frontiers, a measure of the psychic dividend or ESG utility premium generated by investing in high‐ESG portfolios is proposed. Results obtained in risk and return rates and Jensen, Treynor, alpha, VaR, tracking error, information coefficient, efficient frontiers, and utility premium show the value of following responsible investment criteria and the clear disadvantages in investing in companies that do not report ESG information. This research contributes to the debate on the importance of socially responsible investment guided by ESG criteria, filling a gap in the literature regarding Latin America and confirming the better performance by calculating a wide range of portfolio evaluation indicators. We proposed a novel approach to optimization with sustainability constraints, incorporating the utility premium derived from investing in stocks with better ESG performance. [ABSTRACT FROM AUTHOR]

We develop a dynamic portfolio choice model with illiquid alternative assets to analyze the "endowment model," widely adopted by institutional investors, such as pension funds, university endowments, and sovereign wealth funds. In the model, the alternative asset has a lockup but can be liquidated at any time by paying a proportional cost. We model how investors can engage in liquidity diversification by investing in multiple illiquid alternative assets with staggered lockup expirations and show that doing so increases alternatives allocations and investor welfare. We show how illiquidity from lockups interacts with illiquidity from secondary market transaction costs resulting in endogenous and time-varying rebalancing boundaries. We extend the model to allow crisis states and show that increased illiquidity during crises causes holdings to deviate significantly from target allocations. This paper was accepted by Bruno Biais, finance. Funding: S. G. Dimmock gratefully acknowledges financial support from the Singapore Ministry of Education [Grant R-315-000-133-133]. N. Wang gratefully acknowledges support from CKGSB Research Institute. J. Yang gratefully acknowledges the support from the National Natural Science Foundation of China [Grants 71772112, 71972122, and 72072108], Innovative Research Team of Shanghai University of Finance and Economics [Grant 2016110241], and Shuguang Program of Shanghai Education Development Foundation and Shanghai Municipal Education Commission. Supplemental Material: Data are available at https://doi.org/10.1287/mnsc.2023.4759. [ABSTRACT FROM AUTHOR]

This study tests a gender threat hypothesis whereby having a financial advisor of the opposite gender results in gender stereotypical risk attitudes in portfolio choice. We employ a unique dataset of 1,621 advised UK investors, combined with information on the gender of their financial advisors. Confirming the hypothesis, our results show that men advised by a woman take more risk than when advised by a man. Women advised by a man adopt a more cautious approach than when advised by a woman. When the gender threat is alleviated, that is when women are advised by women, and men are advised by men, we found no gender gap in risk-taking. [ABSTRACT FROM AUTHOR]

Shadow prices simplify the derivation of optimal trading strategies in markets with transaction costs by transferring optimization into a more tractable, frictionless market. This paper establishes that a naïve shadow price ansatz for maximizing long-term returns, given average volatility yields a strategy that is, for small bid–ask spreads, asymptotically optimal at the third order. Considering the second-order impact of transaction costs, such a strategy is essentially optimal. However, for risk aversion different from one, we devise alternative strategies that outperform the shadow market at the fourth order. Finally, it is shown that the risk-neutral objective rules out the existence of shadow prices. [ABSTRACT FROM AUTHOR]

We present evidence on how individual risk preferences are related to entrepreneurial investment among the wealthy. To do so, we use novel survey data from the top of the wealth distribution, which have been fully integrated into the 2019 German Socio-economic Panel Study. The data include private wealth balance sheets, in particular the value of own private business assets, and a standard measure of risk tolerance. We find that wealthy individuals are more likely to be entrepreneurs and invest a larger share of their wealth in their own businesses when they are more willing to take risks. A comparison with less wealthy individuals reveals that these associations are stronger among the wealthy. Since the wealthy dominate aggregate risky investment, their extraordinarily high preference for risk and its link to entrepreneurial activity should be taken into account in theory development, empirical analysis, and the design of public policies influencing the riskiness of income and wealth such as progressive taxation. [ABSTRACT FROM AUTHOR]

Policymakers or prospective investors recognize a continuing need to find target industry sectors to expand or contract for a sustainably healthy economy or investment portfolios. This paper discusses how to apply an optimal portfolio theory to selecting target industry sectors. With the information technology and the analytical approach in mind, this paper provides an operational and workable framework for selecting target industry sectors for an economy. The application incorporates the capital asset pricing model, ways to find excess return to risk ratios, unsystematic risk measures, etc. First, this paper shows a practical approach to finding the optimal weights for target industry sectors. Second, this paper develops a heuristic framework for analyzing the performance of industry sectors to construct realistic mixes of industry sectors. [ABSTRACT FROM AUTHOR]

In any society, the relationship between economy and politics is characterized by controversy, enigmas and mysteries. Economic performance affects political results, and the political environment and its process produce financial results. Brazil was hit by economic and political crises from 2012 to 2016. Such crises made it possible to redesign the correlation network between the assets negotiated on the B3 (Brazil Stock Exchange and Over‐the‐Counter Market). This paper aimed to analyse the main aspects related to the topological structure of the assets negotiated on the B3 and its volatility between the pre‐and post‐2014 electoral periods. Results showed the hierarchical clusters and the evolution of the systemic risk, with the banks leading the concentration in the post‐electoral period. The closeness centrality indices for the minimum variance portfolios were modified by approximately 80% between the pre‐electoral and post‐electoral periods. It was concluded that the political events significantly changed the structure, the risk and the possibility of selecting assets for portfolios in the Brazilian market. [ABSTRACT FROM AUTHOR]

Economic models and experiments frequently use lotteries with only a few outcomes. We study the correlation of such lotteries and discuss its relevance for economic applications. In particular, we fully characterize the joint distribution of two binary lotteries via their first three univariate moments and their correlation coefficient. As we illustrate alongside several examples, the resulting parametrization may be useful for economic modeling and experimental design. [ABSTRACT FROM AUTHOR]

Using a unique administrative panel data from Denmark, this article documents the dynamic evolution of households' financial wealth, the equity market participation rate (extensive margin), and the conditional risky asset share of financial wealth (intensive margin) over a 7‐year period around a house purchase. We find that households' equity market participation rate falls during the year of house purchase. Conditional on participation, the risky asset share of financial wealth follows a V‐shape around the house purchase. It decreases and reaches the lowest point 1 year before a house purchase, but jumps up immediately after. This finding suggests that of the three channels identified in the literature that are related to the risky asset demand after a house purchase, the debt retirement channel and the diversification effect dominate the liquidity concern. [ABSTRACT FROM AUTHOR]

This paper proposes a novel method to compute the Krusell and Smith (1997, 1998) algorithm, used for solving heterogeneous-agents models with aggregate risk and incomplete markets when households can save in more than one asset. When used to solve a model with more than one asset, the standard algorithm has to impose equilibria for each additional asset (find the market-clearing price) in each period simulated. This procedure entails root-finding in each period, which is computationally expensive. I show that it is possible to avoid root-finding at this level by not imposing equilibria each period, but instead temporarily suspending market clearing. The proposed method then updates the law of motion for asset prices by using the information on the excess demand for assets via a Newton-like method. Since the method avoids the root-finding for each time period simulated, it leads to a significant reduction in computation time. In the example model with two assets, the proposed version of the algorithm leads to an 80% decrease in computational time, even when measured conservatively. This method is potentially useful in computing general equilibrium asset-pricing models with risky and safe assets, featuring both aggregate and uninsurable idiosyncratic risk, since methods that use linearisation in the neighborhood of the aggregate steady state are considered to be less accurate than global solution methods for such models. [ABSTRACT FROM AUTHOR]

We propose a general approximation method for the determination of optimal trading strategies in markets with proportional transaction costs, with a polynomial approximation of the residual value function. The method is exemplified by several problems, from optimally tracking benchmarks and hedging the log contract to maximizing utility from terminal wealth. Strategies are also approximated by practically executable, discrete trades. We identify the necessary trade-off between the trading frequency and trade size to ensure satisfactory agreement with the theoretically optimal, continuous strategies of infinite activity.

This paper investigates a robust portfolio selection problem with the agent's limited attention. The agent has access to a risk-free asset and a stock in a financial market. But she does not observe perfectly the expected return rate of the stock so she has to estimate this key parameter before making decisions. Besides the general observable financial information, the agent can also acquire a news signal process whose accuracy depends on the agent's attention. We assume that the agent pays limited attention on the signal and she does not trust her estimation model. So it is necessary to consider model ambiguity in this paper as well. The agent maximizes the expected utility of her terminal wealth under the worst-case scenario. Under this setting, we derive the robust optimal strategy explicitly. In the presence of the attention and ambiguity aversion, the myopic term of the strategy, the hedging term of the strategy and the worst-case scenario are all changed. We find that more attention makes the variance of the estimated return smaller. The numerical examples also show that a more attentive agent has a better estimation of the unobservable parameter and is more confident on her estimation. Consequently, the worst-case scenario deviates less from the reference model, which implies a higher expected return rate under the worst-case scenario, thus invests more in the stock.

ESG rating dispersion has left responsible investors in great confusion and posed non-negligible barriers to sustainable investment. Despite its importance, there is a lack of research on the role of ESG rating dispersion in portfolio decisions and asset pricing for the Chinese capital market. We reveal the negative return predictability of ESG rating dispersion, which cannot be solely attributed to common risk exposures. We also consider two potential mechanisms based on institutional investor demand and belief dispersion underlying this negative relation. Our findings have important practical implications for asset managers seeking to optimize financial performance while investing responsibly. [ABSTRACT FROM AUTHOR]

The spread of Coronavirus Disease 2019 significantly influenced the global economy. Companies from the health care industry could emerge as potential winners in health crises, and their listed stocks could potentially outperform. For the first time in the English and German language literatures, this study investigates whether this occurred and which factors influenced the short-term stock price performance of companies from the health care industry during epidemics and pandemics. An event study of virus-related epidemics and pandemics from 2000 to 2020 was conducted. The results show that the stocks of companies from the health care industry tend to outperform the market during pandemics. The selection of the subindustry in the health care industry and the region of the stock markets significantly influenced abnormal returns. The results are especially relevant for investors seeking short-term trading opportunities but also provide implications for diversifying their portfolios during epidemics and pandemics. [ABSTRACT FROM AUTHOR]

I study the allocation problem of investors who hold their portfolio until reaching a target wealth. The strategy suppresses final wealth uncertainty but creates a time horizon risk. I begin with a classical mean variance model transposed in the duration domain, then study a dynamic portfolio choice problem with Generalized Expected Discounted Utility preferences. Using long-term US return data, I show in the mean variance model that a large amount of time horizon risk can be diversified away by investing a significant share of equities. In the dynamic model, more impatient investors are also more averse to timing risk and invest less in equities. The optimal equity share is downward trending as accumulated wealth approaches its target. [ABSTRACT FROM AUTHOR]

N mutual funds compete for fund flows based on relative performance over their average returns, by choosing between an idiosyncratic and a common risky investment opportunities. The unique constant equilibrium is derived in closed form, which implies that funds generally decrease the investments in their idiosyncratic risky assets under competition, in order to lower the risk of the relative performance. It pushes all funds to herd and hurts their after-fee performance. However, the sufficiently disadvantaged funds with poor idiosyncratic investment opportunities or highly risk averse managers may take excessive risk for a better chance of attracting new investments, and their performance may improve comparing to the case without competition and benefit the investors. [ABSTRACT FROM AUTHOR]

We propose a two-country model in which preferences change endogenously as a function of the popularity of traded goods. In equilibrium, expected returns and return volatility vary over time, agents prefer popular goods, and their portfolios are biased toward the country that produces the preferred goods. A home bias arises because home equity offers a better investment opportunity for hedging against changes in preference. The dependence of state prices on time-varying popularity reduces the cross-country correlation of consumption growth. These results do not hold when the preferences are constant. The comparison between empirical impulse response functions and those implied by the model supports our theory. [ABSTRACT FROM AUTHOR]

This paper investigates a robust portfolio selection problem with the agent's limited attention. The agent has access to a risk-free asset and a stock in a financial market. But she does not observe perfectly the expected return rate of the stock so she has to estimate this key parameter before making decisions. Besides the general observable financial information, the agent can also acquire a news signal process whose accuracy depends on the agent's attention. We assume that the agent pays limited attention on the signal and she does not trust her estimation model. So it is necessary to consider model ambiguity in this paper as well. The agent maximizes the expected utility of her terminal wealth under the worst-case scenario. Under this setting, we derive the robust optimal strategy explicitly. In the presence of the attention and ambiguity aversion, the myopic term of the strategy, the hedging term of the strategy and the worst-case scenario are all changed. We find that more attention makes the variance of the estimated return smaller. The numerical examples also show that a more attentive agent has a better estimation of the unobservable parameter and is more confident on her estimation. Consequently, the worst-case scenario deviates less from the reference model, which implies a higher expected return rate under the worst-case scenario, thus invests more in the stock. [ABSTRACT FROM AUTHOR]

Saving and investment behaviour is crucial for all individuals to guarantee their welfare during work-life and retirement. We introduce a deep reinforcement learning model in which agents learn optimal portfolio allocation and saving strategies suitable for their heterogeneous profiles. The environment is calibrated with occupation- and age-dependent income dynamics. The research focuses on heterogeneous income trajectories dependent on agents' profiles and incorporates the parameterisation of agents' behaviours. The model provides a new flexible methodology to estimate lifetime consumption and investment choices for individuals with heterogeneous profiles. [ABSTRACT FROM AUTHOR]

We show that investors tend to hold the same securities as their parents. This intergenerational correlation is stronger for mothers and family members who are more likely to communicate with each other. An instrumental variables estimation and a natural experiment suggest that the correlation reflects social influence. This influence runs not only from parents to children, but also vice versa. The resulting holdings of identical securities increase intergenerational correlations in portfolio choice, exacerbate wealth inequality, and amplify the consequences of behavioral biases. [ABSTRACT FROM AUTHOR]

We seek the best skewness models for portfolio choice decisions. To this end, we compare the predictive ability and portfolio performance of several prominent skewness models in a sample of 10 international equity market indices. Overall, models that employ information from the option markets outperform models that only rely on stock returns. We propose an option‐based skewness estimator that accounts for the skewness risk premium. This estimator offers the most informative forecasts of future skewness, the lowest prediction errors, and the best portfolio performance in most of our tests. [ABSTRACT FROM AUTHOR]

Features, or contextual information, are additional data than can help predicting asset returns in financial problems. We propose a mean-risk portfolio selection problem that uses contextual information to maximize expected returns at each time period, weighing past observations via kernels based on the current state of the world. We consider yearly intervals for investment opportunities, and a set of indices that cover the most relevant investment classes. For those intervals, data scarcity is a problem that is often dealt with by making distribution assumptions. We take a different path and use distribution-free simulation techniques to populate our database. In our experiments we use the Conditional Value-at-Risk as our risk measure, and we work with data from 2007 until 2021 to evaluate our methodology. Our results show that, by incorporating features, the out-of-sample performance of our strategy outperforms the equally-weighted portfolio. We also generate diversified positions, and efficient frontiers that exhibit coherent risk-return patterns. [ABSTRACT FROM AUTHOR]

Considering the effects of mortality risk awareness and idiosyncratic mortality force on economic decision-making of a retiree, we study the optimal post-retirement consumption and portfolio problem with mortality risk awareness, idiosyncratic individual mortality force. We derive a closed optimal strategy in a complete financial market under stochastic interest rate and national population mortality force by martingale method. A numerical illustration is performed, and shows that mortality risk awareness and idiosyncratic individual mortality force have important effects on the consumption and investment of retiree. Especially, the demand of longevity bond is significantly affected by mortality risk awareness. [ABSTRACT FROM AUTHOR]

We develop a new test for threshold-type regime changes in the risk exposures in portfolios with a large number of financial assets whose returns exhibit an approximate factor structure. Unlike existing procedures to detect discrete shifts in factor models, our test is robust to regime-specific second moment of the common factors. We rely on an auxiliary threshold regression: we take a weighted cross-sectional average of the cross-sectional units; we estimate the factors from the original model under the null hypothesis of no regime changes; we construct a Lagrange multiplier statistic to test for threshold effect in the auxiliary regression. Numerical results show the good finite sample properties of our procedure. The empirical analysis uncovers the dynamics of portfolio weights and diversification benefits in factor mimicking portfolios across different regimes. [ABSTRACT FROM AUTHOR]

Research background: The aim of the article is to compare Polish and US dividend companies with potential growth with dividend companies with potential value, including in the period of economic turbulence caused by the pandemic, and to identify macroeconomic determinants that affect changes in the level of share prices of dividend companies with potential value listed on the stock exchange in Poland and the US. An analysis of the literature and international studies conducted allows us to identify inflation, gross domestic product (GDP), interest rate levels, exchange rate changes, and market P/E and P/BV ratios, as well as the PMI index, as the most important macroeconomic factors.

One of the most dynamic trends in the development of the modern market of financial investments is ESG investing. Investing which is based on the inclusion of Environmental, Social and Governance criteria into consideration. In this case, there is an actual problem of analysis mapping ESG criteria with investment risk management. This article considers specific features of inclusion ESG assessments into investment risk management. For this purpose, the S&P Global system of ESG scores was used. The assessments of market risk for both direct and portfolio investments were considered. The dichotomy between the approaches of diversification and prioritization based on ESG criteria had been identified. The article offers expansion of portfolio risk management within the framework of a three-criteria optimization model (risk, return, and ESG score based criteria). The article justifies the investment decision on the basis of construction of an effective set of pair “risk – ESG score” which provides an analogue of the classical frontier line in modern portfolio theory. The implementation of this approach was carried out to the companies included into stock index baskets of three Central and Eastern European (CEE) stock markets: Poland, Czech Republic and Hungary.

Many models of investor behavior predict that investors prefer assets that they believe to have positively skewed return distributions. We elicit detailed return expectations for a broad index fund and a single stock in a representative sample of the Dutch population. The data show substantial heterogeneity in individuals' skewness expectations of which only very little is captured by sociodemographics. Across assets, most respondents expect a higher variance and skewness for the individual stock compared to the index fund. Portfolio allocations increase with the skewness of respondents' return expectations for the respective asset, controlling for other moments of a respondent's expectations. [ABSTRACT FROM AUTHOR]