Customized CSR ratings and optimal sharpe portfolios in the Bursa Malaysia

Abstract

Economic dominance of optimal portfolios over the naïve diversification policy, among others, has been found to depend upon portfolio size (N) as argued by Duchin and Levy (2009) and Nor and Islam (2016). Apart from portfolio model, the benefit of involving corporate social responsibility (CSR) is still in uncertainty until now as argued by Fieseler (2011) and Joan and Thomas (2015). Hence, this paper extends prior literature by proposing a framework which constructs CSR rating using experts’ opinions, and subsequently optimizes portfolios of firms with strong and weak CSR ratings. In consequence, the performances of Sharpe-optimal portfolios are juxtaposed with those of equal-weighted schemes across different sizes. As the result, Sharpe optimal model outperforms the naive diversification in all sample period and all scoring. This paper follows the optimal conditions of Sharpe optimal model documented in prior researches. Besides, the result showed that the bottom CSR scoring portfolio is outperforming the top CSR scoring in all different financial conditions. The study finds that this is due to internal factors such as (companies’ involvement) and external factor (economic factor).