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Individual investor’s risky asset share, as well as stock market participants’ choice of total- and systematic stock portfolio risk, are found to be affected by financial risk-taking among peers. Furthermore, the results indicate that the influence of peers is stronger for less wealthy, for those with relatively higher disposable incomes, and for male investors, respectively. The results, obtained using an instrumental variable approach based on analysis of detailed individual level data, are robust towards a number of competing explanations and stress that interaction with peers’ is an important channel through which individuals’ overall financial risk-taking is affected.

Novel evidence is provided of a positive correlation between parents’ and their children's socially responsible mutual fund investment behavior. Although captured parent-child correlations reflect contemporary relationships, they reveal potentially important insight into the origin of heterogeneity in individuals’ prosocial behavior. Consistent with research on socialization, the results suggest an influence from both parents, stronger for mothers, and reinforced for parents both investing in socially responsible mutual funds. Parental resources during an individual's adolescence (financial and parental life experience) are further found to significantly explain individuals’ adult prosocial investment behavior. The results are robust to conditioning on a number of alternative explanations.

Purpose

The purpose of this paper is to measure individual investors’ expectations of risk and return and to evaluate different expectation measures.

Design/methodology/approach

The authors measure individual investors’ expectations of risk and return regarding an index fund and two stocks using survey data on a random sample of individual investors in Sweden. The survey contains three different return and four different risk expectation measures. To evaluate the different expectation measures, three different evaluation perspectives are considered.

Findings

The risk expectations obtained from the different measures are positively correlated across respondents, but their average magnitudes differ considerably across measures. The return expectations are also positively correlated, and their magnitudes also differ, but to a lesser extent. Consequently, the same individual can express risk expectations that either underestimate or overestimate the forward risk, depending on the measure that is used. The variations in the expectations mainly relate to differences in the responses to the questions underlying the different measures, rather than to the methods used to obtain the expectations. The results from the evaluation of the measures indicate that the expectation measure proposed by Dominitz and Manski (2011) is the only measure for which it is possible to distinguish between individuals’ expectations, using all three of the evaluation perspectives.

Originality/value

This is, to the best of the authors’ knowledge, the first paper that evaluates different survey measures of individual investors’ expectations of risk and return.

Event study methodology is used to analyse whether bad news in the form of Environmental (EV) incidents affect firm value negatively. An international sample of firms with EV incidents is studied. It is found that EV incidents are generally associated with the loss of value. For European firms, the loss is statistically significant and the magnitude of the abnormal returns should be of economic significance to corporations and investors. The results are not sensitive to multiple variations in methodology, including the use of international versions of the market model as well as of multi-factor models of the Fama-French type. Results are also robust to different parametric and nonparametric test statistics.

The study provides empirical evidence on how minimum tracking error varies, as the stringency of a sustainability criterion is varied. The sustainability criterion is based on environmental (EV) ratings for a universe of large capitalization U.S. firms. Increasingly sustainable portfolios are created from increasingly smaller subsets each containing stocks with increasingly higher EV ratings. Minimized tracking error standard deviation increases with sustainability stringency and varies from 0.4% per year for a portfolio, created from the 400 stocks with the highest EV ratings to 4.6% per year for a portfolio, created from the 20 stocks with the highest EV ratings. These sustainable portfolios’ tracking errors appear to be equal or lower than those of existing sustainable funds from similar universes.

Based on a formal model of how investments in corporate socialresponsibility act upon firm value through goodwill, we derive the hypothesisthat under uncertainty bad news are detrimental to goodwill, and subsequentlyhave a negative impact on value. We examine by event study methodologywhether bad news in the form of environmental (EV) incidents affect firmvalue negatively as measured by abnormal returns using a global data set. AnEV incident is a company incident allegedly in violation of international normson environmental issues. We analyse 142 EV incidents 2003–2006. The EVincidents are generally associated with loss of value, but which are notstatistically significant, except for incidents for firms in Europe. Furthermore,results indicate that firms with low goodwill capital (high EV risk rating) areassociated with relatively larger negative abnormal returns in case of an EV incident.

This paper examines the performance of US stock portfolios constructed and rebalanced to have different environmental (EV) risk. EV risk is proxied by EV risk ratings from GES Investment Services. Portfolios with high EV risk generate higher raw returns than low EV risk portfolios, but when risk and other factors are controlled for using the three Fama-French factors and a momentum factor, the risk-adjusted returns of both high and low EV risk portfolios are not statistically different from zero. The evidence thus indicate that a portfolio of stocks with low EV risk, intended to be more responsible, neither underperform or outperform on a risk-adjusted basis.

We derive analytical formulas for the post-horizontal and asymptotic behavior of earnings, dividends, book value, and key financial ratios, as implied by the terminal value model of constant perpetual abnormal earnings growth. The implications of Claus and Thomas (2001) (CT) abnormal earnings growth forecasts for these quantities are examined and found reasonable. Analysis of the implicit functional relationships between the equity premium and the aforesaid quantities using CT's U.S. data reveals that a traditional premium of 8% implies 14% asymptotic growth in abnormal earnings, earnings, dividends and book value, and equally extreme asymptotic return-on-equity, price-to-earnings and price-to-book ratios.

Portfolio performance evaluations indicate that managed stock portfolios on average underperform relevant benchmarks. Transaction costs arise inevitably when stocks are bought and sold, but the majority of the research on portfolio management does not consider such costs, let alone transaction costs including price impact costs. The conjecture of the thesis is that transaction cost control improves portfolio performance. The research questions addressed are: Do transaction costs matter in portfolio management? and Could transaction cost control improve portfolio performance? The questions are studied within the context of mean-variance (MV) and index fund management. The treatment of transaction costs includes price impact costs and is throughout based on the premises that the trading is uninformed, immediate, and conducted in an open electronic limit order book system. These premises characterize a considerable amount of all trading in stocks.

First, cross-sectional models of price impact costs for Swedish stocks are developed using limit order book information in a novel fashion. Theoretical analysis shows that the price impact cost function of order volume in a limit order book with discrete prices is increasing and piecewise concave. The estimated price impact cost functions are negatively related to market capitalization and historical trading activity, while positively related to order size and stock return volatility. Total transaction costs are obtained by adding the relevant commission rate to the price impact cost.

Second, the importance of transaction costs and transaction cost control is examined within MV portfolio management. I extend the standard MV model by formulating a quadratic program for MV portfolio revisions under transaction costs including price impact costs. The extended portfolio model is integrated with the empirical transaction cost models developed. The integrated model is applied to revise portfolios with different net asset values and across a wide range of risk attitudes. The initial (unrevised) portfolios are capitalization-weighted and contain all Swedish stocks with sufficient data. The standard MV model, which neglects transaction costs, realizes non-trivial certainty equivalent losses relative to the extended model, which, in addition, exhibits lower turnover, higher diversification, and lower transaction costs incurred. The evidence suggests that transaction cost control improves performance in MV revisions, and that price impact costs are worthwhile to consider.

Third, the research questions are studied within index fund management. I formulate two index fund revision models under transaction costs including price impact costs. Each model is integrated with the empirical transaction cost models. Transaction costs including price impact costs, cash flows, and corporate actions are incorporated in the empirical tests, which use ten years of daily data. In the tests, the two index fund revision models and several alternative approaches, including full replication, are applied to track a Swedish capitalization-weighted stock index. Instead of using an extant index, an index is independently calculated according to a consistent methodology, mimicking that of the most used index in the Nordic region, the OMX(S30). The alternative approaches are tested under a number of variations including different tracking error measures and different types and degrees of transaction cost control. Index funds implemented by the index fund revision models under transaction cost control dominate, in all dimensions of tracking performance considered, their counterparts implemented without transaction cost control as well as the funds implemented by full replication. Price impact costs constitute the majority of the transaction costs incurred. Additional results indicate that some common tracking error measures perform similar and that the technique to control transaction cost by constructing an index fund from a pre-defined subset of the most liquid index stocks is not efficient.

The overall conclusion of the thesis is that transaction costs matter, that transaction cost control improves portfolio performance, and that price impact costs are important to consider.