Combinatorial nonlinear goal programming for ESG portfolio optimization and dynamic hedge management

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Compared to their fundamentally weighted counterparts naively diversified investment portfolios that embrace environmental, sustainability and governance (ESG) factors are known to experience enhanced long-term investment performance. This paper introduces a combinatorial nonlinear multiple objective optimization model to diversify the short-term ESG portfolio. The expectation of long-term wealth creation from an ESG portfolio is also examined. This latter investment objective is explored by implementing a discrete period ESG portfolio re-balancing with attached dynamic hedging. Post simulation, we report comparatively higher Sharpe ratios and lower VaR metrics for the multiobjective and dynamically hedged ESG portfolio investment style.

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Mathematical and Statistical Methods for Actuarial Sciences and Finance