Thinking beyond the monetary objectives of modern portfolio theory : a tri-dimensional optimization model for thematic investments leading to practical advice

Methling, Florian; von Nitzsch, Rüdiger (Thesis advisor); Breuer, Wolfgang (Thesis advisor)

Aachen (2020)
Dissertation / PhD Thesis

Dissertation, Rheinisch-Westfälische Technische Hochschule Aachen, 2020


The way financial decisions are understood and handled has changed drastically over time so that new financial tools are needed to capture the multi-dimensionality of these decisions and their developments. In the context of this dissertation, these decisions relate to portfolio decisions of private investors that allocate an investment budget to various financial products. While modern portfolio theory has traditionally focused on wealth-related objectives, i.e., return and risk, recent developments in the area of thematic investments seem to go beyond these limits, as they can no longer be displayed in conventional models. Ethical concerns, personal interests, or the conformity with personal convictions motivate investors to include non-monetary objectives in their decisions. So-called thematic funds exploit this expansion of objectives to advertise their allocations. Thematic investors thereby follow a modified core satellite strategy in which conventional funds ensure diversification whereas supplemented satellite funds accommodate investors’ additional non-monetary interests. Both portfolios are separately allocated ignoring beneficial inter-portfolio correlation effects. However, modern portfolio theory has originally tried to optimize these correlation effects. Consequently, efficiency of core satellite portfolios can only be achieved by chance. This study provides more specific theoretical foundation and quantifies the efficiency of core satellite portfolio solutions. The efficiency of thematic core satellite investing is evaluated by stating a three-dimensional model for thematic investments and by comparing both portfolio solutions. Furthermore, this study develops two approaches to reduce the inefficiency of a core satellite strategy. One addresses fund providers with the idea of tailoring thematic funds to conventional ones. The other approach addresses private investors providing pragmatic heuristics for their two-portfolio decision.