Does limiting ones investment universe limit the return on a portfolio?
The Modern Portfolio Theory holds that, in general, diversification reduces risk and maximizes long-term returns. Therefore, anything that limits an investor’s ability to diversify increases investment risks unnecessarily. To eliminate, say, tobacco company securities limits a manager’s ability to diversify into an industry that may outperform the rest of the stock market. This argument ignores the fact that one hires a manager because s/he is good at narrowing the universe of investable options. And, Modern Portfolio Theory is just that: a theory. Indeed, as discussed below, some studies indicate that particular screens do not impair portfolio performance. Citations to these and others will be found in the Resources appendix. Top of Page What do the benchmarks indicate about performance? One benchmark, the Domini 400 Social Index (DSI), now exists for socially screened portfolios made up of U.S. equities. This 400 company index modeled on the Standard & Poor’s 500 (S&P 500) applies so
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