PORTFOLIO OPTIMIZATION OF ESG STOCKS USING THE MARKOWITZ MODEL ON ALL GREEN INDEXES IN INDONESIA
Keywords:
Efficient Frontier, ESG Investment, Jensen’s Alpha, Markowitz Model, Portfolio Optimization, Sharpe Ratio, Treynor Measure
Abstract
ESG (Environmental, Social, and Governance) investments are becoming popular because they may provide competitive financial returns while promoting sustainable development. However, the uptake of ESG investments is limited due to barriers such as a lack of understanding and insufficient information. Indonesia has ESG-oriented indexes, such as SRI-KEHATI, ESG Leaders, ESG Sector Leaders IDX KEHATI, and ESG Quality 45 IDX KEHATI serve as a basis for ESG stock selection. This research uses the Markowitz model to optimize an ESG portfolio from four Indonesian green indices. The Markowitz model is employed to determine the optimal weights for establishing a portfolio on the efficient frontier. Using monthly adjusted closing prices from 2019 to 2024, the optimal portfolio suggested by four green indexes offers a balance of risk/return ratio. The optimal portfolio's performance comparison, which is measured by using the Treynor measure, Sharpe ratio, and Jensen's alpha is done to indicate which portfolio provides better risk-adjusted returns. The findings may provide optimal ESG portfolio choices to investor depending on their financial goals and risk tolerance. This research may also inspire other investors who have not yet invested in ESG companies to consider green investing, as ESG stocks provide investors with many benefits.References
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BlackRock. (2020, December 03). BlackRock Survey Shows Acceleration of Sustainable Investing. Retrieved from BlackRock: https://ir.blackrock.com/news-and-events/press-releases/press-releases-details/2020/BlackRock-Survey-Shows-Acceleration-of-Sustainable-Investing/default.aspx
Bodie, Z., Kane, A., Marcus, A. (2013). Essentials of investment: Global edition. In Essentials of Investment Information Center (7th ed.). McGraw-Hill Irwin.
Chen, J. (2020, March 18). Portfolio Investment: Definition and Asset Classes. Retrieved from Investopedia: https://www.investopedia.com/terms/p/portfolio-investment.asp
Chen, J. (2022, July 12). Portfolio Return: What it is, How it Works. Retrieved from Investopedia: https://www.investopedia.com/terms/p/portfolio-return.asp
Chen, J. (2024, May 16). Risk: What It Means in Investing, How to Measure and Manage It. Retrieved from Investopedia: https://www.investopedia.com/terms/r/risk.asp
Chen, J. (2024, June 21). What Is Unsystematic Risk? Types and Measurements Explained. Retrieved from Investopedia: https://www.investopedia.com/terms/u/unsystematicrisk.asp
Gamal, Marco Salman. 2010. The Optimal Return and Risk Portfolio of Indonesian Stocks. Final Defense. Bandung: Institut Teknologi Bandung
Hargrave, M. (2023, December 15). Average Return: Meaning, Calculations and Examples. Retrieved from Investopedia: https://www.investopedia.com/terms/a/averagereturn.asp
Hayes, A. (2023, March 6). What Are Returns in Investing, and How Are They Measured?. Retrieved from Investopedia: https://www.investopedia.com/terms/r/return.asp
Hayes, A. (2024, March 19). Coefficient of Variation: Meaning and How to Use It. Retrieved from Investopedia: https://www.investopedia.com/terms/c/coefficientofvariation.asp
Hayes, A. (2024, May 28). Portfolio Variance: Definition, Formula, Calculation, and Example. Retrieved from Investopedia: https://www.investopedia.com/terms/p/portfolio-variance.asp
Indonesia Stock Exchange. (n.d.). Stock Index. Retrieved from Indonesia Stock Exchange: https://www.idx.co.id/en/products/index/
Institute of Business & Finance. (n.d.). The Importance of Standard Deviation in Investment. Retrieved from Institute of Business & Finance: https://icfs.com/financial-knowledge-center/importance-standard-deviation-investment
Investopedia. (2023, July 26). How Is Covariance Used in Portfolio Theory?. Retrieved from Investopedia: https://www.investopedia.com/ask/answers/041315/how-covariance-used-portfolio-theory.asp
Investopedia. (2024, July 30). What Is ESG Investing?. Retrieved from Investopedia: https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp
KEHATI Foundation. (n.d.). IDX KEHATI ESG Sector Leaders Index. Retrieved from KEHATI Foundation: https://kehati.or.id/indeks-esg-sector-leaders-idx-kehati/
KEHATI Foundation. (n.d.). ESG Quality Index 45 IDX KEHATI. Retrieved from KEHATI Foundation: https://kehati.or.id/indeks-esgq-45-idx-kehati/
KEHATI Foundation. (n.d.). SRI-KEHATI Index. Retrieved from KEHATI Foundation: https://kehati.or.id/indeks-sri-kehati/
Kenton, W. (2023, November 21). Markowitz Efficient Set: Meaning, Implementation, Diversification. Retrieved from Investopedia: https://www.investopedia.com/terms/m/modernportfoliotheory.asp
Kenton, W. (2024, May 17). What Beta Means for Investors. Retrieved from Investopedia: https://www.investopedia.com/terms/b/beta.asp
Kenton, W. (2024, June 09). Rate of Return (RoR): Meaning, Formula, and Examples. Retrieved from Investopedia: https://www.investopedia.com/terms/r/rateofreturn.asp
KPMG. (2022). Survey of Sustainability Reporting 2022. Retrieved form KPMG: https://assets.kpmg.com/content/dam/kpmg/se/pdf/komm/2022/Global-Survey-of-Sustainability-Reporting-2022.pdf
Kusumo, Gajah. (2024, June 30). Daftar Saham Ramah Lingkungan dengan Skor Tertinggi di Indeks ESG Leaders 2024. Retrieved from Bisnis.com: https://hijau.bisnis.com/read/20240630/653/1778157/daftar-saham-ramah-lingkungan-dengan-skor-tertinggi-di-indeks-esg-leaders-2024
Lins, K. V., Servaes, H., & Tamayo, A. (2017). Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis. The Journal of Finance.
Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7.
Morgan Stanley. (2019). 2019 Sustainability Report. Retrieved from Morgan Stanley: https://www.morganstanley.com/content/dam/msdotcom/sustainability/Morgan-Stanley_2019-Sustainability-Report_Final.pdf
Nathan, Bekha. (2024, May 24). 7 Key Benefits of ESG Investing. Retrieved from Finance Alliance: https://www.financealliance.io/7-benefits-of-esg-investing/
Nekhili, M., Nagati, H., Chtioui, T., Rebolledo, C. (2017). Corporate Social Responsibility Disclosure and Market Value: Family versus Nonfamily Firms. Journal of Business Research, 77(C).
O’Shea, A. (2023, March 31). What is Stock?. Retrieved from Nerd Wallet: https://www.nerdwallet.com/article/investing/what-is-a-stock
PwC. (2021). PwC’s 2021 Global Investor Survey. Retrieved from PWC: https://www.pwc.com/gx/en/services/audit-assurance/corporate-reporting/2021-esg-investor-survey.html
Radhiyan. 2010. Optimal Portfolio Risk and Return Analysis of BISNIS27 Index Members in 2009 - 2010 Using Markowitz Efficient Theory. Final Defense. Bandung: Institut Teknologi Bandung
Segal, T. (2023, July 1). What Is Diversification? Definition as Investing Strategy. Retrieved from Investopedia: https://www.investopedia.com/terms/d/diversification.asp
Segal, T. (2023, September 16). Measuring a Portfolio’s Performance. Retrieved from Investopedia: https://www.investopedia.com/articles/08/performance-measure.asp
Wall Street Prep. (n.d.). Portfolio Beta. Retrieved from Wall Street Prep: https://www.wallstreetprep.com/knowledge/portfolio-beta/
Published
2024-06-30
How to Cite
Astri Budiarti, & Oktofa Yudha Sudrajad. (2024). PORTFOLIO OPTIMIZATION OF ESG STOCKS USING THE MARKOWITZ MODEL ON ALL GREEN INDEXES IN INDONESIA. Journal of Social and Economics Research, 6(1), 2402 -. https://doi.org/10.54783/jser.v6i1.557
Section
Articles
