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INTRODUCTION
Socially responsible investing is fast becoming an acceptable investment style, with approximately $10 billion of mutual fund assets and upwards of $200 billion of union pension funds invested in socially responsible portfolios [Middleton (1995)]. With socially responsible investing only securities of companies with desirable social attributes qualify for inclusion into the portfolio; "socially undesirable" securities are screened out.' However, social screening is incompatible with modern portfolio theory, which posits that utility-maximizing investors must hold some combination of the market portfolio of all risky assets and the risk-free asset. By imposing position constraints on security holdings, social screens restrict the feasible investment opportunities set, and could result in dominated portfolios which exhibit lower return for a given level of risk, or higher risk for the same return level [Levy (1978)]. Whether socially responsible investing entails an opportunity cost is an empirical question which several researchers have attempted to investigate. The empirical evidence to date is mixed.
Wood (1992) and Tepper (1993) report that socially responsible investing had underperformed market averages. Wood reports that in the UK socially responsible portfolios underperformed the Financial Times-All Share Stock Index during the period 1988-1991. Tepper, testing various social screens on US stocks, finds that socially screened portfolios would have underperformed the S&P 500 stock index by 1% on an annualized basis during the period 1984-1989. On the other hand, Litvak (1992) reports that the rate of return from a socially-screened portfolio compared favorably with the S&P 500 stock index during the period 1979-1989. Luck and Pilotte (1993) find the Domini Social Stock Index outperforming the S&P 500 by a margin of 2% per year during the subsequent period 1990-1992. Litvak and Luck and Pilotte did note that the socially screened portfolio exhibited higher volatility than the market portfolio. Recently, Diltz (1995) finds from his analysis of common stock portfolios that ". . . the market appears to reward good environmental performance, charitable giving, and an absence of nuclear and defense work, and it appears to penalize firms that provide familyrelated benefits such as parental leave, job sharing, and dependent care assistance" (p. 69).
For individual investors interested in socially responsible investing the most convenient medium is a socially responsible mutual fund (SRF hereafter). But do SRFs provide individual investors...