The 'Immorality Premium' and the Relative Undervaluation of Sin Stocks

Open Access
- Author:
- Mandel, Mark Ross
- Area of Honors:
- Finance
- Degree:
- Bachelor of Science
- Document Type:
- Thesis
- Thesis Supervisors:
- Orie Edwin Barron, Thesis Supervisor
Quanwei Cao, Thesis Supervisor
Dr. Brian Spangler Davis, Thesis Honors Advisor - Keywords:
- Sin
stocks
immorality
premium
risk-adjusted return
finance
s&p500
security market line
model
capital
asset
pricing - Abstract:
- This thesis investigates various categories of sin stocks and thus brings to light up-to-date findings and patterns within the “dark” side of stock market investing. Institutional and private investors may cite a moral obligation to avoid investing in companies that deal with alcohol, tobacco, defense, gambling, and adult entertainment; however, this study demonstrates how moral tendencies can lead them to sacrifice potentially higher financial returns. The returns produced by sin stocks are averaged, risk-adjusted, and used in conjunction with the Capital Asset Pricing Model to provide a more accurate estimation of expected returns due to the atypical behavior of sin stocks and, consequently, their relative undervaluation. The broad analysis of current sin stock returns and risk measures against the stock market index serves to accomplish two principal functions: the first mission is to modernize the previous research on the subject that was based on outdated information in order to determine if the trends of the past research are still relevant and applicable today; the more important objective, however, is that the newly discovered CAPM formula modification will provide a strong starting point for supplementary research and more rigorous statistical analysis geared at uncovering further abnormalities within the realm of sin stocks.